Energy efficiency loans: What you need to know

Property owners have a few different financing options available to them for energy efficiency improvements. An energy-efficient mortgage is a mortgage-backed (or "secured") loan, meaning you use your property as collateral. Energy efficiency loans are unsecured loans, more like personal loans or lines of credit that you can take from a creditor.

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Energy efficiency loan overview

  • Does not require your home as collateral.

  • Good option for consumers who are unable or unwilling to use an energy efficiency mortgage.

  • If you default, the lender can hire a collection agency and your credit score will decrease.

  • Interest paid is not tax-deductible.

  • You can be approved in minutes.

With an unsecured energy efficiency loan, you can borrow money from a lender to make energy efficiency upgrades to your property without using it as collateral. The penalty for defaulting on the loan is smaller – they do not require collateral, and the lender cannot foreclose on your home. However, they are also riskier for the lender than mortgage-backed loans, which can result in higher interest rates.

As with other energy efficiency financing options, you can find energy efficiency loans to fund a variety of projects. In most cases, these loans are better suited to large projects, such as replacing windows, insulation, or heating and cooling systems in your house, rather than small purchases like energy efficient appliances and lighting.

Each of your energy efficiency financing options, including energy efficiency loans, energy efficient mortgages, PACE financing, and on-bill financing, offer distinct benefits. 

Energy efficiency loans can be quick & easy for homeowners

Energy efficiency loans offer two distinct advantages over energy efficient mortgages: they don't require you to put your property up as collateral, and applications can often be processed on the same day. If you don't have equity in your home or don't want to use it, energy efficiency loans offer a good alternative. Additionally, depending on the financing provider, you may be able to receive an approval on the same day as you submit your loan application.

Convenience may come at an added cost

Compared to energy efficient mortgages, energy efficiency loans typically offer slightly lower long-term savings. While this isn't the only reason to conduct energy efficiency measures for your home or business, it is worth considering.

There are two reasons why unsecured energy efficiency loans can cost slightly more in the long term than energy efficient mortgages. Unsecured energy efficiency loans don't use your property as collateral and therefore don't require that you hold significant equity in your home.

However, if your property doesn't back your loan, it creates additional risk for the lender. As a result, energy efficiency loans typically have higher interest rates than energy efficient mortgages. Additionally, unlike energy efficiency mortgages, the interest for unsecured energy efficiency loans is not tax-deductible.

Energy efficiency loans can have terms running from five to 20 years. If you are interested in seeing the savings from your energy efficiency investment on day one, a longer loan term with smaller monthly payments is a good way to achieve it. However, you may end up paying more interest over the course of the loan as a result.

There are specialized home energy financing companies, like Renew Financial and EnerBank USA, that offer unsecured loan products specifically tailored to home energy improvements. Your energy efficiency contractor can often connect you with loan options through these organizations or others.

Some states or municipalities also offer unsecured energy efficiency loans. One example is the Massachusetts HEAT Loan program, which is part of the Mass Save energy efficiency initiative. Massachusetts utilities and the Massachusetts Department of Energy Resources sponsor the HEAT Loan program. It offers 0% financing options for homes and businesses conducting a variety of home energy upgrades, including:

  • Heating system replacements

  • Domestic hot water and solar water heaters

  • Central air conditioning and heat pumps

  • Insulation & replacement windows

  • Central wood pellet heating systems

  • Deep energy retrofits

  • Removal of asbestos and vermiculite

  • Upgrading knob & tube wiring

Utilities and local governments across the country offer similar programs – contact your state energy office, or your utility, to find out if there are options available near you.

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