They're Handing Out the Money - Time to Get In Line
April 30, 2009
by Craig Severance
Thinking about a title for this story was difficult. Every title I could think up that expresses the true spirit of what I want to say sounds like one of those junk e-mails we all get. You know:
- Get Your Stimulus Money Now!
- The Time Has Never Been Better!
- Sign up for Your Rebate Now!
- Best Loan Terms Ever!
You see what I mean. All of the above actually applies to this story, so please don't tune out.. The factors coming together right now are making this the best time ever to do a Total Energy Makeover on your home. I will spell out exactly how all this can work.
Lower Your Overall Housing Costs Per Month. Very importantly, refinancing your home loan at today's very low interest rates can be a big cost saver, This presents a unique opportunity to do a major Home Energy Makeover -- i.e. get everything done -- and that Energy Makeover will drastically cut your utility bills.
The Energy Makeover -- which will increase the value of your home significantly -- can produce lower total monthly housing costs than you are paying right now, PLUS give you thousands of dollars in up-front Federal Tax Credits.
Perfect Package. In the middle of the Perfect Storm for our economy, government and utility companies have now responded by creating a host of incentives that add up to a Perfect Package for homeowners:
- Lowest Mortgage Interest Rates in Decades
- Utility Rebates for Energy Conservation Measures
- Utility Rebates for Solar Energy
- Federal Tax Credit for 30% of First $5000 for Energy Saving
- Federal Tax Credit for 30% of cost of Solar Hot Water Heating
- Federal Tax Credit for 30% of Solar Electric
They are literally "handing out the money" right now, for a brief period to stimulate the economy and encourage people to save energy. Most of these incentives will expire after a set time period.
Where Else? Another reason to invest in your own home right now is to shore up the home front against the economic storm, by cutting your overall housing costs. Preventing future energy cost increases from affecting your family may be one of the best things you ever did. Cutting your tax bill also lowers your family budget.
How To Put This All Together. The key to making the cash flow work for a major Energy Makeover is to finance the improvement. Refinancing your home mortgage, and including the Energy Makeover costs, converts the cost into a monthly payment. The goal is utility bill savings that are bigger than any increase in mortgage payments -- so your total housing costs actually go down.
Sample Home Energy Makeover. Get everything done that can be done to your home to cut energy use (why wait?):
- Energy Saving Improvements. Have an Energy Audit done, and do everything recommended. This will usually include insulating anything not already well insulated -- attic, walls, crawl space or basement -- and hiring a "House Doctor" to come in with a "Blower Door" to find and seal air leaks so the house is no longer drafty. Other needed measures are likely to be a programmable thermostat, new windows or perhaps insulated blinds for your windows, adding new south-facing windows if feasible for passive solar heat, exterior shading or summer screens to block summer sun on East and West windows, and upgrading your furnace and air conditioner to the best high-efficiency models. Finally, new energy-saving appliances may also come into the mix. Total cost in our example: $25,000 before tax credits and rebates. Utility rebates add up to $1,000 and Federal Tax Credit is $1,500 so total net cost is $22,500. Savings of a conservative 35% on electric and gas bills that had been runnng $2750/year. Total annual savings in first year would be about $960 at today's utility rates.
- Solar Hot Water. Solar hot water is now standard practice in many countries, and is more cost effective than solar electric. So save the first part of your roof for solar hot water. Total cost in our example: $6,700 minus Federal Tax Credit of $2,000, so net cost is actually $4,700. Total savings of 70% of what had been an average $45/month for water heating, for about $375/year savings at today's utility rates.
- Solar Electric. Both the utility company and the government are paying a high percentage of the total cost of solar photovoltaic systems right now. A good system can almost eliminate your remaining electric bill. In our example, let's do a 5 KW home system costing $37,500. Utlity rebate here is $17,500 and Federal Tax Credit of $6,000, so total Net Cost is $14,000. A 5 KW system in Grand Junction, CO can produce about 8,000 kWh/year for total savings of roughly $900 at today's utlity rates.
Total Monthly Housing Costs - NOW (WITHOUT MAKEOVER)
How Big is YOUR Bill?
Let's assume you had started paying a $200,000 loan several years ago, which now has a $175,000 home loan balance at 6.5% interest on your existing mortgage.
Based on the original $200,000 loan, the principal & interest payments on your existing mortgage had been running $1,265/month.
Your existing annual gas & electric bills are now running $2,750/year for average monthly utility bills equaling $ 229/month
We'll assume taxes & insurance escrow = $ 201/month
Total Monthly Housing Costs - Now = $1,695/month
New Refinancing With Total Energy Makeover Included
When you refinance, we'll assume you finance your share after utility rebates but you haven't received any Federal Tax Credits yet, so you have to finance your share before receiving any Federal tax Credits:
Everything Energy(minus Utility Rebates): $ 24,000
Solar Hot Water: $ 6,700
Solar Electric (minus Utlity Rebate): $ 20,000
Existing Mortgage: $175,000
Loan Closing Costs $ 3,000
Total New Mortgage Balance $ 228,700
Total Monthly Housing Costs - AFTER Home Energy Makeover
Shrink Those Bills!
At today's very low rates, at 5% interest for example, this $228,700 beginning loan balance would result in principal & interest payments on the new mortgage running not much more than the existing payment:
NEW Mortgage Prin & Int at about : $ 1,375/month
NEW Home Energy Bills Average: $ 45/month
We'll assume taxes & insurance escrow = $ 225/month
Total NEW Housing Costs Per Month = $ 1,645/month
This is $50 LESS PER MONTH than total housing costs WITHOUT the Total Home Energy Makeover -- at Today's Utility Prices -- and does NOT include the Federal Tax Credits yet.
Note that a lot of this comes from the fact you were already assumed to be paying principal & interest amortized on a beginning loan balance higher than today. This is pretty typical, though, and is one major reason why refinancings often are affordable. If this doesn't apply to your situation, e.g. you just bought or refinanced your home very recently, your mortgage payment might go up slightly more than your initial energy savings, but consider the very nice Federal Tax Credits - below:
First Year Savings WITH Federal Tax Credits
Lower Total Housing Costs/month x 12 = $ 600 in 1st Year
Federal Tax Credit for Energy Savings = $ 1,500
Federal Tax Credit for Hot Water = $ 2,000
Federal Tax Credit for Solar Electric = $ 6,000
TOTAL FIRST YEAR SAVINGS = $ 10,100
2nd YEAR SAVINGS (if utility rates go up 10%) = abiout $800
Each new year's savings will be higher as utility rates go upward.
Conclusion: A major Home Energy Makeover can work to REDUCE your overall costs significantly, even when you include the big ticket items like windows and furnace and air conditioner replacement. The low interest rates are a key right now, and the utility rebates and Federal Tax Credits provide up-front cash in your pocket as a reward for "doing the right thing". You also end up with a much more comfortable and more valuable home.
Can I start sendng out the mass e-mails now??
None of the above is specific tax or financial advice. Consult your own tax advisor, mortgage lender, and financial advisor for specific advice for your own situation. You will need an energy audit specific to your own situation to estimate your own energy savings.
This Article was orignally posted on April 30, 2009
