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Energy Conservation Can Pay Big Dividends

Financial Planning

December 2005

Energy Conservation Can Pay Big Dividends

After facing this year’s high utility bills, there can be little doubt that energy efficiencies in your home can mean big savings on utilities. To that end, the federal government and many state governments provide financial incentives for homeowners’ investments in energy efficiencies within their homes, but is there any reason, other than saving a few utility or tax dollars, to invest in an energy efficient home? Let’s take a look.

Home Purchase

Unless you are independently wealthy, chances are you will have to borrow the money to purchase your home. Aside from the value of the home being purchased, the major consideration for lenders is your ability to repay your loan. Your income is the best measure of that ability. In most cases, a lender will look at your wages and/or self-employment income, along with other recurring income, to decide whether you are a good credit risk.

If, however, you are purchasing a home that qualifies as an energy efficient home, you may qualify for an "energy efficient mortgage." The energy efficient mortgage program allows lenders greater flexibility in evaluating a home loan. The primary way it does this is to allow the lender to include monthly energy savings in your "income" calculation. By doing this, it can allow you to acquire a larger home than you could otherwise get.

To qualify for this program, you must either acquire a home that is already considered energy efficient or acquire a home that you are also upgrading with energy efficiencies. In the case of existing construction, the borrower can borrow 100% of the cost of energy efficient improvements up to 15% of the value of the home. The maximum amount that can be borrowed drops to 5% of the value of the home for new construction. Third-party inspectors are required to determine the energy efficiency of the home in question.

Home Resale Value

Many factors go into determining the potential resale value of your home. These include the neighborhood, the current real estate market, the state of repair of your home, etc. What many people don’t factor into their thinking, though, is the effect energy efficiency has on your home’s value. That effect can be significant.

According to studies by the United States Environmental Protection Agency (EPA), expenditures on energy efficient upgrades to a home can net an increased home value equal to 2 to 4 times the cost of those upgrades. For a typical ENERGY STAR® Home, the average value increase was $8,400. Another way to look at the value of energy efficiency in a home is to look at the value per $1 of reduction in annual utility bills. The same EPA study found that the home increased $20 in value for every $1 of energy savings.

So, what is an ENERGY STAR® Home? It is a home that has been certified as meeting the EPA’s ENERGY STAR® standards. The process to obtain such certification is fairly straight forward and requires a third-party conservation expert to evaluate your home, or potential home, based on EPA performance standards. Your real estate agent or home builder should be able to assist you in contacting the right agencies to obtain such certification.

Other benefits

Energy efficient homes provide other benefits that cannot be readily seen. Because homes that are certified as ENERGY STAR® Homes are built based on a whole-home approach, the builder must ensure that all systems in the home work together to achieve maximum efficiency. This means that initial construction of the home has to be of the highest quality, which also means there will be fewer builder callbacks to fix deficiencies. The quality of the craftsmanship of an ENERGY STAR® Home will also translate into higher durability of the home and lower maintenance costs.

Perhaps the most attractive of the unseen benefits of an ENERGY STAR® Home are the health benefits. Because the heating and ventilation systems of the home must work together to achieve the highest energy savings, the air delivered to the home can be much cleaner than in less energy efficient homes. This can translate into better health for the occupants and lower medical costs.

Conclusion

Energy efficient homes are for more than just the environmentally conscious homeowner. Government mortgage incentives, lower operating costs and higher resale value combine to provide a powerful argument for purchasing an energy efficient home or for upgrading your existing home’s energy performance. When you consider the potential added health benefits, ensuring that your home is energy efficient is just plain common sense.

Have a great holiday season and a very prosperous 2006.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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