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Community and Q&A

Principal, interest, taxes, and insurance – but not utilities?

DCContrarian | Posted in General Questions on

This is a green policy question.

The housing market in this country is driven by financing. Financing is driven by government-created markets in mortgages and government-backed insurance. Under those policies, the principal measure used to assess a borrower’s suitability for a loan is their ability to make the monthly house payment: principal, interest, taxes and insurance. Yet the monthly payment doesn’t include utilities, which can be more than taxes or insurance, and can certainly vary much more dramatically.

Including utilities in the monthly payment would encourage conservation. More efficient houses would have lower monthly costs and would command higher prices. It’s already true that high taxes or insurance costs depress home values. People talk about payback periods for energy improvements, but the payback would come when you sell the house, whether that’s decades down the road or you’re fixing up a house to flip it.

I don’t think it would be cumbersome to implement. Here in DC the permit office requires a stamped Manual J for every new home or major renovation. Existing homes have a usage history. Lenders could require sellers to provide either a Manual J or a usage history. It would be in the banks’ interest as well, since their monthly payment calculator would more accurately reflect what the borrower was getting into.

It’s an oft-repeated refrain that 99% of buyers don’t care about efficiency. This is a simple way of making them care, that’s in their own interest and good for the environment.


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  1. Richard Levinson | | #1

    They sort of account for that in Canada (or at least "heat costs") as part of the mortgage qualifying calculations for government-insured mortgages. You can see under "Heat Costs" in this link:

    But in practice, I'm not sure it really has much of an effect. My understanding is that lenders usually just use a rough rule of thumb, though I suppose if you were buying a super-efficient house you could probably successfully argue that the heat costs # should be lower. A more rigorous requirement (i.e. utility history or Manual J for each house) would probably be more useful though.

  2. Expert Member
    Zephyr7 | | #2

    I don’t think this will work, primarily because predicting actual utility expenses for a residence isn’t so simple. Imagine someone who bakes a lot, and runs their electric oven all the time, or someone who always leaves the TV and a bunch of lights on, someone who charges their electric car at night. There are MANY variables.

    Another issue is that there are many different electric rates people can choose from. Some will get interruptible rates for their air conditioning, which means a lower per-kWh rate but possible interruptions to service during times of extremely heavy load on the grid. Some people (like me) get a “time of day” rate which has different rates for on-peak (higher per kWh) and off-peak (much lower per kWh), which result in different bills for the same load compared to the general rate.

    Normal mortgage stuff is easy to calculate because it’s the purchase price, which is set at the time of purchase and never changes, the interest rate, which probably doesn’t change (ARMs aside), and the tax rate which is usually fairly predictable. Lenders like that the buyer can’t do anything to change the predictability of any of those things too.

    Utility rates and how much people use is just too variable, and you have the many decades old standards the lenders use that would be difficult to change too.

    What may be a better way to encourage people to make their homes efficient is something like the energy star program which markets a simple number — something easy to understand. The difficulty with that would be condensing all the varied efficiency stuff that can go into a house down to one simple number for buyers to compare.

    Personally, I’d try an educational campaign and add it to the “first time buyer” brochure guides you can get. Tell people to look for certain things, explain how much money those things might save over the life of the home, stuff like that. We all know efficiency improvements DO have a payoff, but most people don’t understand these things so it’s an “out of sight, out of mind” scenario and they look at the fancy countertop or nice landscaping instead.


    1. DCContrarian | | #3

      I think you're being too literal. The actual energy usage of the resident isn't relevant. The point is not to try and predict actual utility bills, it's to get people to take a longer-term viewpoint on efficiency, and to incentivize the people making decisions to care more about efficiency. What I'm talking about is builders building new houses and renovators making improvements for resale.

      It's not hard to imagine two houses that are comparable, but one Manual J's out to 60k BTU and the other to 30K. Imagine as well that this works out to a $1200 annual difference in utility bills. In today's market $100 a month works out to about $25,000 in house purchasing power. Is it inconceivable that a builder could get that 60K house to 30K for less than $25,000 in improvements? Absolutely, and if that were the market conditions every builder would make those improvements, because the house would sell for $25,000 more*. But in today's market there is zero incentive for the builder because the two houses are going to sell for the same amount because the buyer has no way of knowing the difference.

      It's a way of monetizing efficiency improvements. Any improvement with less than a 20-year payback becomes economically viable, whether or not the person who makes the improvement lives in the house for 20 years or not. The consumption habits of individual homeowners doesn't matter, what's important is the aggregate and average effect, both for the banks and on energy consumption.

      *(It's likely the house would actually sell for more than $25K more, due to the logic of the real estate business. When the buyer goes to sell they will get their $25K back from the next buyer, plus appreciation. So they may be willing to pay more than $25k more because it's not really a cost.)

  3. Kris Anderson | | #4

    Are you suggesting that the lender pays the utility companies directly, like they pay taxes and insurance?

    Or do you mean that there would be a required disclosure to sellers about estimated utility costs, based on Manual Js?

    1. DCContrarian | | #5

      Neither. I'm suggesting that estimated utilities be a factor in assessing credit-worthiness of borrowers on government-backed loans.

      There would be a required disclosure, but it would have teeth, in that the bank would use it in its underwriting decision.

      You get points for buying an energy-efficient house regardless of your personal energy use habits.

      1. Expert Member
        Malcolm Taylor | | #6

        The devil would be in the details. It would have to be based on manual J not usage, to eliminate occupant behaviour. My experience with Manual J has been that the results vary an awful lot depending on who does them. I wonder how you could overcome that?

        1. DCContrarian | | #8

          Right now, every government backed mortgage (which is essentially all of them) requires an appraisal. Which do you think is more scientific and objective, the Manual J or the appraisal?

          And it wouldn't just be the Manual J. Some parts of the energy estimate would be quite objective: 80% efficient boiler vs. 90% efficient boiler, gas water heater vs resistance electric vs heat pump, for example.

          1. Expert Member
            Zephyr7 | | #11

            Except that still doesn’t account for the temperature people set their thermostat at.

            You’d probably be better off trying to add in the purchase price of the boiler itself in this case rather than the operating (fuel) costs.


          2. John Clark | | #31

            No. Not every govt guaranteed mortgage requires an appraisal.

            The efficiency of the mechanical are factored into the price of the house. They just account for an extremely small portion of the overall price. (less than 5 percent prices difference between code-min and "high efficiency").

      2. John Clark | | #29

        Mortgage lending doesn't work that way and the last thing the industry needs is another "disclosure". Mortgage lending is all about risk assessment.

        It's not going to do what you want it to do.

  4. Tyler Keniston | | #7

    This may display my utter lack of economic and housing market knowledge, but if energy improvements increase the value of a house (which in some markets and circles it probably already does) wouldn't occupants end up essentially paying back through the mortgage the money otherwise saved through efficiency improvements? So living in a highly efficient house would become comparably expensive to an inefficient house because the inefficient house would have lower mortgage payments?
    I'm probably missing something. I see the value of the approach as a way to incentive investment in efficiency, but from a buyers standpoint, I don't see the incentive unless the buyers chooses to personally value efficiency over a granite counter-top.

    1. DCContrarian | | #9

      The problem I'm trying to address is that the conventional wisdom is that buyers are indifferent to energy efficiency, largely because they have no way of telling the difference between an efficient house and an inefficient one. So there's no point in paying for efficiency improvements if the payback period is longer than the length of time you intend to own the house. Since often those decisions are made by builders or flippers who intend to own the house for zero time, their incentive is to just do whatever has the lowest up-front cost.

      Typically when a buyer makes an offer on a house, it is contingent on being able to finance it. The most common reason that financing falls through is that the house doesn't appraise for what the buyer is offering. When that happens, the seller has to make a choice: lower the price to closer to the point where the property qualifies for financing, or lose the sale and try again. If energy efficiency were part of the financing equation then sellers would face the same dynamic, where they would have to either lower their asking price or make energy improvements.

      1. Tyler Keniston | | #14

        I think finding ways to incentive is a worthy thought experiment.

        As far as the specifics, do I understand: With energy improvements made, the value of the house goes up (as per appraisal, using manual J or whatever metric is determined to make some sense). At the same time, the banks are willing to lend more to a prospective buyer since that buyer can afford the extra mortgage payments in lieu of the utility payments. Check?

        Assuming this is the case, then BOTH selling value and approved lending value have increased proportionally, meaning we're back where we started as far as the buyer offering less than appraisal, no? All it's done is drive up the market?

        Putting aside the lending confusion for a second: At face value, if a seller can get more value out of a house for energy improvements (period), than it does make sense that energy improvements are incentivized for a seller.

        Thinking about the other side of the coin, though, if the combined cost to purchase and operate is made equivalent between the two hypotheticals (an efficient house and an inefficient but swanky one), then it seems like we're back to relying on buyer choices, not monetary incentive.

        So, then, going back to the seller, what incentive do they actually have to increase value via energy improvements unless buyers are making preferential choices to value said improvements over something like a simple cosmetic upgrade (granite). I might be thinking about this all wrong, if so, apologies.

        There might be ways it works, and intuitively I do feel like an efficient house should be valued higher than an inefficient one (since it's cheaper to operate), but if the 'cheaper to operate' is essentially erased due to added market value, than it seems like it becomes a wash.
        Perhaps the key is for the operational savings to still be higher than the increase in mortgage payments? Perhaps that's been the intention all along and the issue with my confusion.

      2. John Clark | | #30

        [The problem I'm trying to address is that the conventional wisdom is that buyers are indifferent to energy efficiency, largely because they have no way of telling the difference between an efficient house and an inefficient one. So there's no point in paying for efficiency improvements if the payback period is longer than the length of time you intend to own the house. Since often those decisions are made by builders or flippers who intend to own the house for zero time, their incentive is to just do whatever has the lowest up-front cost.]

        - Yes there is. A prospective homeowner can acquire the historical cost from the utilities.
        - BTW there already is a system in place for new construction and it's called HERS Ratings. The market really doesn't care about HERS ratings.

  5. Andy CD Zone 5 - NW Ohio | | #10

    Yeah, Tyler, that seems odd. The purpose of this whole conversation is to suggest a meaningful way to account for efficiency in homes; to modify social policy to incentivize rather than discourage it. But it's lipstick on a pig. All of this is attempting an end run around a much more entrenched and insidious social policy--the subsidization of fossil fuels. Energy costs MUST be more honest; once energy consumption is priced and taxed at a level that reflects its true cost to society these changes will make themselves. Exhibit A: the Paris Accord.

    1. Expert Member
      Zephyr7 | | #12

      Fuel costs are honest. The “true cost” stuff is just a way to subsidize other things, so you’re back basically advocating to implement exactly the thing you’re arguing against. If you actually spend some time looking into how those “true cost” numbers are arrived at, you’ll see a lot of arbitrary number finagling and outside party interests are being snuck in — it is NOT objective at all.


      1. Andy CD Zone 5 - NW Ohio | | #13

        OK, Bill, one person's "true cost" is another's "number finagling." I'm just struck how the impulse to modify real estate lending policy to incorporate a home's efficiency emerges from the reality that energy costs are NOT otherwise an important factor. That's bizarre to me, given the environmental pickle we're in. I'm not advocating against subsidies--I'm enthusiastic about subsidization as a powerful tool for changing our collective course. "Finagling" with fossil fuel subsidies is a more direct way to make efficient homes more valuable. I'm OK with whatever "outside party interests" come along for that ride.

      2. DCContrarian | | #17

        The true costs may be just estimates and subject to all of the vagaries of estimates, but fuel costs absolutely are not honest. The production of energy is subsidized at every step of the way by governments all over the world.

        1. Expert Member
          Zephyr7 | | #19

          You can say that about just about anything if you pick the numbers you want to use. I could say wind and/or solar power is more subsidized than conventional generation (which is basically true), as an example.

          There are a lot of people that want to tax/regulate/etc to force particular things in the energy sector. The people proposing these things often have no idea of the realities of the industry. I don’t mean political issues, I mean physical realities that can’t be avoided. It is a VERY complex system and most people don’t have the background to understand it.

          An example is some years back when California was having rolling blackouts and power “shortages” (a different issue and a whole other story). A local costco here in Michigan had half their lights shut off saying they “care” and were “helping with the power shortage in California”. Sounds good right? The reality is it does nothing at all. California is part of the pacific intertie, Michigan is part of the eastern interconnection, which are asynchronous systems. There is no way to transfer power between these regions right now. Saving power in one region not only doesn’t help the other, it’s not possible to help the other.


        2. John Clark | | #32

          You're forgetting that the un-subsidized cost will be passed down the line to the economy as a whole (ex, manufacturers of solar panels, foam, etc etc).

          BTW. Oil/gas isn't as subsidized as you might think, and many of the subsidies serve a dual purpose so you can't just extrapolate the "oil/gas" portion.

    2. DCContrarian | | #16

      I agree that fuel costs need to be higher to reflect the externalities created in their production. At the same time it's definitely true that there are things that need to be done on the demand side as well.

      Look at automobiles for an example. Fuel economy standards have been effective at raising fuel efficiency in general. While the situation isn't exactly the same, there are similarities between the auto market and the house market, in that the person making efficiency decisions isn't the one who has to live with them. The average car has five owners over its lifetime, but only the first owner gets to decide what the car is, the other four owners have to buy a car that someone else picked out. First owners tend not to care about fuel economy, compared to the depreciation on a new car the cost of fuel is nominal. Second and subsequent owners tend to care more about total operating cost, but they're stuck with the decisions that have already been made by others.

      So even if you believe in market-based solutions, as I do, there is a role for regulation and standards as well.

      1. Expert Member
        Zephyr7 | | #18

        I can tell you that buyers absolutely DO care about fuel economy. I hear that all the time around hear as many of my customers are auto suppliers, and I contract to two of the big domestic auto manufacturers as well. It’s true that some customers don’t care as much about fuel economy as they do about other things, but that’s not everyone, and there will always be some people who care more about things other than the lifetime fuel costs of a vehicle.

        How much people care about fuel costs depends on many factors, a big one being current fuel prices. That makes sense, except that people don’t often think much past “gas costs x today”, and it’s a notoriously volatile commodity that may cost much more (or less) in even a few months in the future. It is NOT true that most buyers don’t care about fuel economy.

        The problem is that increasing fuel economy increases vehicle costs, and buyers have to think about purchase prices too. There are also physical limits and were closer to those than people seem to think, at least in terms of ICE efficiency. Many people seem to think “if they wanted to, they could double mileage!”, but that’s not true. Engineering is all about tradeoffs, and you make different tradeoffs depending on your particular requirements for any particular product or project.


  6. T Carlson | | #15

    I think the appraisal system is the problem and needs an overhaul. There is really no consideration to quality and so many ways to game that system it really is quite useless.

    If something is given value people notice, unfortunately appraisers are like home inspectors who play by rules that require them to fudge or twist or ignore so deals go through or they don't get very far.

    Escrowing utility bills would be tedious given the unpredictable nature.

    1. John Clark | | #25

      If the payback on a more energy efficient home is 15-20 yrs the initial owner just doesn't care. For example years ago in my area many new homes were being sold with HERS ratings and that has all but disappeared. That shows you that my market does not demand better performing homes.

      The unfortunate reality is that the vast majority of homebuyers buy tract homes and consequently rely on local/state building codes and code enforcement with regards to this sort of thing.

  7. DCContrarian | | #20

    Relatedly, I just learned that starting January 1 California is requiring all new houses built in the state to have solar power.

    From the news coverage: "The [California Energy] commission estimated the new standards will increase the price of a new house by roughly $9,500. It noted, however, that over 30 years, homeowners will save roughly $19,000 in reduced electricity bills, for an overall savings. Put another way, a mortgage payment would increase by $40 a month due to the rules, but the homeowner would save $80 a month in electricity costs on average, the agency calculated."

    1. Expert Member
      Malcolm Taylor | | #21

      I struggle to understand the way some of the financial arguments around solar are framed.

      I just got a $20,000 quote for an array for a recently built house that should completely offset their $1200 a year electrical bill. The company framed the argument in two ways:
      - The annual return on investment is 6%, which is pretty good right now.
      - The mortgage payment would only increase by extra $600 a year.

      The first argument seems like it doesn't include the depreciation of the asset. What part of the initial capital investment remains at the end of say the 30 years california is using?
      The second one doesn't take into account lost opportunity costs of tying that borrowing up in the mortgage rather than other investments.

      I'm not saying it's not a good idea to go ahead, but I wish the financial arguments were framed in a way that included those variables, along with some considerations of inflation and prospective electricity rate increases.

      1. DCContrarian | | #22

        Buying a home is a unique situation, for virtually all Americans it is the only time in their lives they will be able to borrow a large sum of money at a low interest rate. This is thanks to government intervention in the housing market.

        Right now mortgage rates are around 3%. If you can borrow money at 3% and invest it at 6% that is a money-printing machine. Especially when you consider that the interest you pay is likely deductible, and the return on that investment is likely to grow as energy prices rise.

        If you can finance the solar array as part of your home purchase there is no lost opportunity cost, because you couldn't use that money for other investments, the special nature of the home mortgage market means it can only be used for housing (which is why Americans tend to over-invest in housing but that's a separate discussion). However, your access to this money-printing machine is limited by the availability of credit, and the amount of government-subsidized money is not unlimited. In fact it is sharply limited. The Federal Housing Administration sets a limit of 31% of your income for principal, interest, taxes and insurance. They don't care how much you pay for each of those items, the total can't be more than that 31%. For most Americans their cost of funds for non-housing is higher, often much higher. If your cost of funds is over 6% it's not a money-printing machine any more, it's a money pit. So they may not have available credit to take advantage of that money-printing machine.

        The typical household spends 6% of their income on utilities. If the FHA instead used a formula that principal, interest, taxes, insurance and utilities can't exceed 37% of income, for the average homebuyer nothing would change. However, sellers of homes would be incentivized to make energy improvements if the reduction in utility bills more than offsets the cost of the improvements.

        1. John Clark | | #26

          The reality is that solar arrays are no different than a swimming pool or an outbuilding. The equipment performs as long as the homeowner chooses to maintain it and the usefulness depends on homeowner behavior. I would even suggest that homes with solar use more power than they otherwise would with out it as they're just financing it via the cost of the panels along with the taxpayer financing part of it via tax credit.

          1. DCContrarian | | #40

            Solar arrays are different in that they produce a thing of value that is a commodity that is almost universally needed and easily valued.

            Most home improvements provide "utility," which varies tremendously from person to person and from time to time. That swimming pool may not be as valuable to the next buyer as is was to you, it may not even be as valuable to you in five years as it was when you bought it.

            A solar array that cranks out $100 worth of electricity every month has very consistent value.

          2. John Clark | | #42

            Reply to DCC.

            Value is subjective. Not everyone wants solar panels just as not everyone wants a pool. For some people spending an extra $100/month on electricity is a worthy trade off for a clean roof line and the home will be priced accordingly.

            $100/mo over 30 yrs is $36k dollars. How much do you think that solar array would cost to acquire and maintain w/out federal tax credits and rate schemes?

          3. Stephen Sheehy | | #45

            Swimming pools are considered a liability, not an asset, in many parts of the country.I
            I haven't spend one cent on maintenance of my solar panels in the nearly five years they've been on my roof.
            The idea that people with solar panels used more power is silly. If anything, we're more concerned about useage.

          4. John Clark | | #48


            [I haven't spend one cent on maintenance of my solar panels in the nearly five years they've been on my roof.
            The idea that people with solar panels used more power is silly. If anything, we're more concerned about useage.]

            Ya, well 5 yrs really isn't a litmus test of reliability. Inverters have a service life of approx 10 yrs so we have at a min one-time replacement of about $1600. In all look at having to replace an inverter and the HVAC equipment combined every 10-15 yrs. That'll run about $7k combined no?

            Oh and the typical human behavior of consumption being inversely proportional to cost is well established.

      2. Expert Member
        Zephyr7 | | #23

        Malcolm, the biggest issue is probably the control electronics. I doubt very much that the inverted units will make it to ten years in most cases. The solar panels will age, and my (admittedly limited here) understanding is that they mostly fail gradually, with capacity reducing over time. That’s a good thing since reduced capacity means you’re not going to be stuck with a big replacement bill at some point. A dead inverter has to be replaced or the entire system is dead.

        Total cost of ownership is a common thing to calculate in the commercial world, but residential buyers don’t usually think about it. Solar WILL have ongoing maintenance costs that I doubt the sellers of the systems are including in their ROI numbers. The reduction is panel output over time also means the amount of the utility bill that can be offset will gradually drop over time, effectively reducing the return on investment of the system over time.

        Complex stuff. I don’t think this should turn people off to solar installations, but I do think the numbers the sellers of those systems like to use in their marketing materials are probably overly optimistic.

        In California specifically, with all their issues with unaffordable housing, I think what they’re doing is foolish. If people can’t afford to buy the house in the first place, the utility savings the solar system provides over the life of the house is irrelevant.


        1. Kevin J | | #34

          Sunpower's panels today degrade at .25% per year. Still 94% efficient after 25 years. I'd be more worried about surrounding tree growth impacting the panels.

        2. DCContrarian | | #41

          A solar array that reduces the cost of living in the house makes housing more affordable. Those with the least benefit most.

          Off-topic, but it's really a misnomer to talk about "affordable housing." What we have in certain parts of this country is a housing shortage. The way our society and economy is organized is that when demand outstrips supply prices rise, and when there are shortages those who have the least money go without.

          Our housing policy since WWII has been focused on creating middle-class wealth, not creating a housing for everyone. Keeping the supply low keeps prices high and keeps homeowners happy.

          1. John Clark | | #43

            It doesn't make it more affordable. You're over estimating the cost of utilities and the ability of solar to offset the cost in areas with high utility costs and low solar output.

            People who are in financial bind over the cost of utilities aren't able to afford homes to begin with.

          2. Expert Member
            Zephyr7 | | #47

            The biggest impediment for most people with buying their first home is coming up with the money for the downpayment. If you take a relatively small ongoing cost such as a percentage of the typical monthly utilities cost and roll that into the mortgage payment, you are front loading the financial package and INCREASING the initial downpayment amount which makes it HARDER for most people to afford to buy the house.

            If you’re worried about housing affordability, and I agree with you that much of the problem is due to supply, you are proposing to add MORE regulatory related cost burdens which is exactly what is causing a lot of the supply shortfall. The system isn’t rigged against low income people. Nicer areas are more desirable, so people are willing to pay more to live there. That, in turn, drives up costs in those nicer areas. It’s basic barter, that’s pretty much all. Any regulatory concerns that limit the ability to build or expand in existing areas artificially creates a shortage which drives up costs even more.


  8. John Clark | | #24

    Utilities are a variable cost as it depends almost entirely on occupant behavior.

    1. DCContrarian | | #38

      What I'm proposing would not be based on actual utility bills or occupant behavior in any way. It would be based on how the house is designed and built and some notion of "typical" use. So if you have two houses in the same climate and one of them Manual J's out to 60k BTU /hr and the other one to 30K, the one with the lower heating load is going to be assumed to use half as much energy to heat. If you put in a heat pump water heater instead of a conventional resistance water heater, your assumed usage goes down.

  9. But Why? | | #27

    Ummm...lets walk this back a little bit. A mortgage loan only HAS to include the mortgage payment. I have NEVER in my life had an escrow for insurance and taxes....NEEEEVVVVERRR!!!! I bought my first home at 21 years old and I am on my third home and probably 5th mortgage sooooo......

    Lets not start a conversation based on a wholly inaccurate premise.

    1. John Clark | | #28

      You were definitely qualified with T&I amounts regardless of whether you opted to escrow.

    2. Expert Member
      Zephyr7 | | #33

      If you put down 20% or more, you would typically have had the option of having the mortgage company handle your taxes and insurance and bill you monthly for that to keep an escrow account funded. If you put down something less than 20%, the mortgage company probably required you to pay into an escrow account. The reason is that the mortgage company has a lien on your house to guarantee the loan they gave you to purchase the house. The mortgage company wants to protect their collateral (which is why they always require to to carry homeowners insurance), and the escrow account let’s them make sure the insurance and property taxes are getting paid.

      The rules they use to qualify people for mortgages aren’t really very complicated. The rules are there to get some minimum level of certainty that a home buyer is going to be able to pay back the mortgage loan. That’s the basic premise. Everything else is “extra stuff”. Personally I don’t see any way that lenders, which are just banksters — finance people — are going to want to roll in any complex stuff they don’t understand, especially stuff like utility rates that really aren’t all that predictable. I think you’d be much better off doing something like the energy star program does for appliances: give a somewhat standardized guesstimate as to yearly operating costs and use it as a selling point for more efficient homes. Let the buyers then use that information to make informed purchasing decisions.


      1. John Clark | | #35

        Mortgage lenders do have access to some "green" loan programs (ex, energy upgrades) and the GSE's have been experimenting with "Green" MBS. There's also work being done on the valuation (appraisal) side. In fact I believe a new addendum currently exists.

      2. DCContrarian | | #39

        Lenders currently roll in insurance and taxes, even though they're not in the insurance business or in the tax assessment business. They're perfectly happy to let the people who are in those businesses figure out those numbers, and use them. The lenders do it because the government requires them to.

        1. John Clark | | #44

          You really don't know how the mortgage market functions. It's about protecting the collateral (ie, the house) and the loan amount. T&I amounts are factored in the DTI ratios because:

          #1: Unpaid taxes have priority lien position over mortgage holders.
          #2: Property insurance protects the value of collateral. If the property is not insured and suffers a catastrophic event the borrowers may walk if they're unable to rebuild/repair the home. Did you know that if a homeowner cancels their homeowners policy the mortgage servicer will be notified and consequently can force the borrowers to pay for new coverage with an insurer chosen by the servicer?

        2. Expert Member
          Zephyr7 | | #46

          They don’t “roll in” insurance and taxes. If your lender is paying those two things for you, they’re paying it out of an escrow account that is funded by you, and it’s detailed out as a separate charge on your monthly statement. In effect they are spreading out the insurance and tax amounts and turning them into a monthly cost for you.

          Insurance and tax amounts are not counted as the interest+principal that is the main component of, and what most people mean by, a “mortgage payment”.


          1. DCContrarian | | #49

            To clarify, when I said they "roll in" the escrow charges I was talking about qualifying for the mortgage. The magic 31% is PITI, it doesn't matter what the makeup is. Banks are happy to calculate the PI and leave the TI to others.

  10. Kevin J | | #36

    I ran the numbers on solar as an investment strategy in MA and it was pretty favorable, even with my less than ideal roof design. Assuming 2% electric rate inflation, 10% market return, and reinvesting all Smart Credits:

    7.7% ROI per year for first 10 years.
    6.6% per year over 25 years.
    Solid return, and you have diversified yourself from the market. Market tanks? You're paying yourself.

    However, when you compare that to not going solar at all with rising energy costs:
    14.2% ROI per year first 10 years
    9.6% ROI per year over 25 years.
    In my case that is a nice little nest egg of $100k over 25 years.

    When you compare it to the lost opportunity cost of your cash investment, it's close to a wash at 10% market return. It's just hard to make up your investment with large market gains and relatively low electric expenses per year and compounding interest.

    Where it really shines is if you take the difference from what you normally pay in electric each year, from your small or non-existent electric utility bill, and invest that money each year. You are used to paying it anyways, so treat it as a sunk cost and put it towards your retirement.

    1. DCContrarian | | #37

      Popular finance tends to overstate the long-term return on investments. Over the past 40 years the S&P 500 has averaged 8.25% annual return. That's before inflation. There were some brutal years for inflation in the 1980's.

  11. Expert Member
    Peter Engle | | #50

    I'm late to this discussion, but this program has already been rolled out. It is called the Energy Score, and has been developed by the DOE

    The Energy Score is like a HERS rating, but simpler to understand and energy costs are extrapolated for the user. One intent is that the Energy Score can be easily calculated by a home inspector at the point of purchase. The American Society of Home Inspectors has been a partner to the development and is somewhat onboard with offering classes to get its members certified.

    The DOE is working with housing lenders to make the Energy Score a consideration for lending. A house with a higher (better) score will cost less to heat and cool, leaving additional funds available to pay the mortgage. There hasn't been much buy-in so far, but the program is out there, and it's actually reasonably well done, in a dumbed-down sort of way.

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