How It Would Work: A Case Study
Mr. Jones bought a house in Arizona in 2008 for $160,000 and financed it with $8,000 down and a 30-year-mortgage Fannie Mae-conforming of $152,000 with a principal, interest, and mortgage insurance payment of $1000 per month. His electric bill averages $310 per month and does not use natural gas. After 3 years, the mortgage balance is $148,000 but the house’s value is now just $120,000.
Mr. Jones decides he wants to refinance his house and do energy improvements. He considers the following improvements and gets estimates on each: additional insulation and a radiant barrier in the attic, Energy Star windows & patio door, an Energy Star hybrid-heat-pump water heater, solar panels, and a geothermal heat pump.
He hires an Energy Inspector to do a Home Energy Rating System (HERS) Audit of his home. It costs about $700. The audit finds the possible improvements to have the following energy-savings impact:
| Item | Upgrade from | Cost Estimate | $ Saved / Mo |
| Attic Insulation to R38 | R13 | $2,000 | $9 |
| Radiant Barrier | None | $1,500 | $7 |
| Dual-Pane Low-e Glass Windows | Single Pane | $5,200 | $41 |
| Dual Pane Low-e Glass Patio Door | Single Pane | $1,000 | $10 |
| Hybrid Heat Pump Water Heater | Standard Electric W/H | $1,600 | $28 |
| 5500w Solar Electric System... | None | $24,000 | $125 |
| ...less Utility Payment | -$5,500 | ||
| Geothermal Heat Pump | 12 SEER Heat Pump | $12,000 | $50 |
Then, Mr. Jones seeks a Streamline refinance loan with an EEM.
Since his payoff balance would be $148,000, the base loan amount would be $148,000.
The EEM limits would be as follows:
Weatherization $8,880 (6% of $148k) HVAC/WH Same Sec. 1122 $28,975 (95% of $30,500 [$24k + $12k - $5.5k])
Mr. Jones EEM plans call for::
Weatherization $9,700 HVAC/WH $1,600 Sec. 1122 $30,500
so the most Mr. Jones can borrow will be:
Payoff Balance $148,000 Weatherization $8,700 (really $8,880, but he elects to pay cash for the patio door) HVAC/WH $1,600 Sec. 1122 $28,975 (Mr. Jones must pay cash or charge the other $1,525) Total $187,275[5]
At a 4.75% interest rate, the principal, interest, and mortgage insurance payment would be about $1164, an increase of $164 per month. However, Mr. Jones energy bills would go from $310 per month to $40. Since the cost of ownership would be reduced from $1310 to $1204 (a reduction of 8.1%), Mr. Jones would qualify for the loan.
From here, Mr. Jones would apply to his utility to receive the $5,500 utility credit for the solar panels he wants to put up. The utility will send him a confirmation letter indicating the date they will have funds available for his project OR (more likely) a letter indicating they’ve deferred the application to another funding cycle and when they’ll expect to send you a confirmation letter.
After and only after receiving the utility confirmation letter, Mr. Jones would need to apply for the refinance/EEM loan and get (a) good-90-day bids on the weatherization work and the water heater (b) commitments from these contractors that they could do the work within 60 days of the loan closing, (c) good-180-day bids on the solar panels and the geothermal heat pump and (d) commitments from these contractors that they can do the work within 150-days of loan closing.
At the time of closing, Mr. Jones original mortgage would be paid off and the funds for energy improvements would be put into an escrow account. At the time of closing, there are two work and payment timelines that must be observed: one for the Section 1122 improvements, and one for the rest.
The contractors for the solar energy improvements and the geothermal heat pump would be paid (a) Mr. Jones’ 5% share of the costs plus (b) an additional 45% of the project costs from the escrow accounts. The contractors would then have 180 days to complete this work. Final payment to these contractors would not occur until a third-party inspector verified to the lender and escrow company that the improvements were complete.
The weatherization and water-heating improvements would need to be completed within 90 days. These contractors would be paid in full at the time of completion. For this work, Mr. Jones could sign a statement certifying that the work has been done to his satisfaction.
In the end, Mr. Jones will have a lower-carbon-footprint home that’s more affordable and at least as comfortable as before he improved it.
See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.
Click Here to go back to Part 1 or Part 2
[5] As a practical matter, the loan would have to be a bit larger (maybe $500-$1000) to cover the cost of proof-of-completion inspections and costs to cover additional administrative burdens.
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