Mortgage Savers: Energy Efficient Homes Lower Risk of Borrower Default

By Gretchen Wegrich

Mortgage loans on energy efficient homes are 32 percent less likely to go into default, researchers discovered in a recent study that found that homes built with energy efficient features can save homeowners from foreclosure. In addition, the more energy efficient a home, the lower the risk of default becomes.

The groundbreaking findings were released March 19 by Chapel Hill Center for Community Capital at the University of North Carolina and the Washington, D.C.-based Institute for Market Transformation, an energy conservation advocate institute.

“It stands to reason that energy-efficient homes should have a lower default rate, because the owners of these homes save money on their utility bills, and they can put that money toward their mortgage payments,” Cliff Majersik, executive director of IMT, said in a statement. “We long believed this to be the case, and now this study proves it. Successful housing market reforms will require reconsidering the risk factors in mortgage default, including energy costs.”

The study focused on ENERGY STAR rated single-family, owner-occupied homes with 30-year fixed-rate mortgage purchase loans originating between 2002 and 2012. ENERGY STAR-rated homes are built or renovated to delivery energy efficiency savings greater than 15% when compared to typical new homes.

The average price of homes in the sample was $220,000. The study controlled for income and loan-to-value ratio.

For the mortgage industry, the study findings may shape future policies. Lenders may decide to lower risk premiums associated with interest rates, develop a more flexible credit profile, or allow for a higher debt-to-income ratio for people who want to buy or refinance an energy efficient home. Such policy adjustments would make energy efficient homes more affordable for many borrowers, particularly in areas with elevated home costs.

Responsive lenders may want to encourage an energy audit or energy rating during the mortgage underwriting process. Similar to the way an appraisal is used to understand the value of the home, an energy rating could help define other important loan characteristics.

The study results raise the question, are buyers who choose energy-efficient homes more financially astute? While the study findings did not draw conclusions about buyers’ financial know-how, the possibility is an interesting consideration for mortgage lenders. Click here to view the study findings.

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Are you considering purchasing an energy-efficient home or are you an energy-efficient homeowner? Share your experiences in the comment box below.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.