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 Mortgages That Offer Relief

From Soaring Utility Bills

By Stephanie I. Cohen
From Marketwatch

As home energy bills soar, government agencies and private lenders are offering homeowners thousands of dollars in financing to seal off drafty windows and purchase energy-saving appliances.

These long-term, low-interest mortgages and loans are aimed at efficiency-minded homeowners who want to cut their utility bills. Borrowers can often arrange 30-year loan periods and interest rates below 10%.

Home buyers that find the perfect house with ancient heating and cooling systems and 20-year old appliances can add an additional $35,000 to their mortgage to improve the energy efficiency of the property using a Federal Housing Authority program.

While the program is aimed at allowing home buyers to tackle a broad array of home improvement projects, such as adding a new roof and replacing the plumbing, the funds can be used to upgrade a heating or air conditioning system, add insulation, weatherize doors and windows and purchase high-efficiency appliances, according to the agency.

The Federal Housing Authority's Streamline K loan program was unveiled in April, 2005 and offers a 30-year mortgage with a fixed or adjustable interest rate set at current market rates. It is a new take on an older FHA loan program that homeowners often found too cumbersome to complete. Check the HUD Web site for more information.

The average loan for the updated program is between $18,000 and $20,000. A couple hundred loans have been administered since the program launched last year but FHA sees interest among lenders ramping up.

The program offers a way to "bring today's energy technology to yesterday's houses," said Doris Ikle, president of CMC Energy Services, in Bethesda, Md. CMC performs audits and energy upgrades for residential customers. Ikle said she has received calls from consumers interested in the new FHA program.

"When people are buying a house particularly if it is an older house...they want at this point to reduce their bills," Ikle said. Yet buyers often have no money left for improvements once they close on a mortgage, she added.

Slowdown should aid idea

The process for receiving funds still adds several steps to a home closing, which can make sellers resistant. Once a bid on a home is accepted it can take 60 days to complete the FHA process and reach closing, so finding a patient seller is helpful.

But a softening housing market is likely to boost the program's prospects. In the absence of bidding wars and with houses sitting on the market longer, sellers -- especially those whose houses may not be up to modern standards -- may be more willing to entertain less traditional offers.

Homeowners must have a professional home energy auditor do an inspection to pinpoint improvements, find a FHA-approved lender (there are about 2,500 in the U.S., although not all participate in this program) and receive contractor estimates.

FHA also offers smaller "energy efficient" mortgages that let homeowners purchase or refinance a home and tuck the cost of efficiency upgrades into a mortgage. Borrowers can add between $4,000 and $8,000 to a 30- or 15-year mortgage to pay for energy improvements. See more about the program.

The upside is that a borrower does not have to make a down payment on the additional financing. In order to have improvements approved a homeowner must show that the value of the energy saved over the life of the upgrade is more than the total cost of the upgrade.

Energy-efficient mortgages aren't exactly new. In 1992 Congress authorized the creation of an energy-efficient mortgage program. FHA insured 26,600 in fiscal year 2003.

But Ikle thinks interest in home energy efficiency is growing. "I think people are really taking the environmental crisis to heart and energy prices have helped too," she said.

State programs

As states plug energy efficiency to help ease residents' energy-bill woes, private unsecured loans offer homeowners focused on the thermostat another financing option with a little less bureaucracy.

Pennsylvania homeowners short on cash can buy energy-efficient heating and cooling systems, ceiling fans, or doors using a low-interest loan from AFC First Financial Corp. in Allentown.

In January, Pennsylvania officials gave $20 million to the Keystone Home Energy Loan Program. AFC, which spearheads the program and has been marketing energy loans since 1999, offers a 10-year loan with a 7.99% interest rate to help finance the purchase of energy-efficient appliances and systems. The interest rate drops to 5.99% for qualified borrowers with low income levels. Read more about the program.

These loans are for consumers who need between $1,000 and $10,000 for home energy upgrades. Peter Krajsa, president of AFC, calls this range of investment the "finance twilight zone" for many homeowners -- an amount often too big to put on a credit card and too small for an equity line of credit. AFC began offering energy loans back in 1999.

These fixed, low-interest loans provide more palatable financing than standard credit-card interest rates, Krajsa said. The company has a 70% approval rating for the loans and has issued $2.5 million in loans through the Keystone program over the past seven months.

Maryland officials grappling with a reported 72% increase for homes served by Baltimore Gas & Electric have contacted AFC to inquire about starting a similar program, Krajsa said.

For homeowners outside of Pennsylvania, AFC offers energy improvement loans in nearly a dozen other states through a Fannie Mae program, although the interest rates on these loans are typically between 10% and 13%. AFC completes about 500 energy loans a month, Krajsa said.

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