Energy efficiency financing: what you need to know

Energy efficiency measures can increase your property values, reduce your electric bills, and create a more comfortable living environment in your home. Various financing options are available to make it easier for homeowners and businesses to invest in energy efficiency.

In most cases, you can get a personal (or unsecured) energy-efficiency loan or an energy-efficient mortgage. Depending on where you live, you may also have access to on-bill financing that you repay through your utility electric bill, or you may be able to take out a PACE loan that you repay through your property taxes.

Energy efficiency loans are similar to home improvement loans that homeowners have used for decades to build a deck or add a second bathroom to their homes. When homeowners borrow money from a lender, they agree to pay it back, plus interest, in monthly installments over the loan term.

Energy efficiency financing also has the same primary considerations as other types of loans:

• Lower interest rates result in lower overall costs for borrowers.

• Loans with shorter terms will generally have higher monthly payments and lower total costs over the life of the loan.

• Loans can be either equipment-backed or mortgage-backed, which results in a wide array of interest rates, term lengths, and credit requirements among loan offerings.

However, in many cases, energy efficiency financing comes with an extra qualification step. For energy-efficiency mortgages, PACE financing, and on-bill financing, you may have to get a home energy audit to prove to the lender that your improvements will be cost-effective.

There are four main types of energy efficiency financing options:

Energy efficient mortgages

Energy efficient mortgages (EEMs) are similar to a standard home mortgage in that they use your property as collateral for a loan. With an EEM, you can purchase or refinance a home that is already energy-efficient or buy or refinance a home that will become energy efficient after energy-saving improvements.

Learn more about energy efficient mortgages.

Energy efficient loans

Energy efficiency loans are unsecured, meaning they don’t require your property as collateral. In practice, they are similar to personal loans or lines of credit that you can take from a creditor.

Learn more about energy efficient loans.

PACE for energy efficiency

Unlike energy efficiency loans and EEMs, Property-Assessed Clean Energy (PACE) financing doesn’t require a monthly loan payment to a creditor. If you take out a PACE loan to fund your home energy efficiency improvements, you repay the amount owed annually as an assessment of your property taxes.

Learn more about PACE for energy efficiency. 

On-bill financing

Funding your energy efficiency projects doesn’t always require taking out a separate loan or refinancing your mortgage. Many utilities offer on-bill financing programs that pair loan repayment with monthly energy bills to make it easier for homeowners and businesses to invest in energy efficiency improvements for their properties.

Learn more about on-bill financing programs.

Like any other financial product, energy-efficient financing options have different structures, terms, and conditions. You need to ask two fundamental questions to find the right financing option.

Do you want a secured or unsecured option?

Energy efficiency financing can be divided into two categories. Secured loans require an asset that will serve as collateral for the loan – in most cases, that asset will be your home. Unsecured loans function more like personal loans or lines of credit and do not require your house as collateral. Both loan categories have implications for the borrower.

How much are you willing to pay for each monthly loan installment?

The amount you want to pay each month will impact the interest rate and the loan length. Loans with longer terms will have smaller monthly payments, but you will pay more in interest over the life of the loan. In contrast, short-term energy efficiency loan payments may exceed your monthly utility bill savings. Still, they offer a better value because you pay less in interest over the life of the loan.

The availability of energy efficiency financing

In addition to traditional banks, many other institutions offer energy-efficiency financing.

1. Energy efficiency companies may offer loans, often through their contractor networks.

2. Credit unions nationwide are developing energy-efficiency loan products for homeowners and often offer lower-cost energy-efficiency loans.

3. National lending institutions offer specialty loan products tailored to energy-efficient buildings.

4. Public-private partnerships can offer energy-efficiency loan programs. Local government agencies partner with private lenders to provide energy efficiency with lower interest rates and no fees.

5. Utilities offer on-bill financing programs that allow homeowners to finance energy efficiency improvements and repay the borrowed amount through electric bills.