Advice provided by: Rob Freeman Jr, LEED AP, Green-Buildings.com

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John asks: What is an Energy Star Mortgage? Where are they available? Is this a smart program?

Answer: Hi John, the ENERGY STAR mortgage program lends money for homes that qualify by being able to save a certain amount of energy.

Qualified homes must fulfill at least one of the following requirements:

1. The home must be ENERGY STAR qualified
2. The home must undergo a "Home Performance with ENERGY STAR assessment" and improvement process that yields at least a 20% total energy savings, or
3. The home must achieve at least 20% total energy savings (via participation in a Weatherization Assistance Program).

Also, all participating homes must be "single-family" (1-4 families) and owner-occupied.

The ENERGY STAR Mortgage program is currently in pilot phase and (as of this writing) is only available in Colorado and Maine. However it's in the initial stage of being considered/rolled-out in Massachusetts, New York, New Jersey, Pennsylvania, and the District of Columbia.

ENERGY STAR Mortgages encourage would-be and existing homeowners to make comprehensive energy efficiency improvements to either new or existing homes by making it more affordable for them to do so. Mortgagors may get an energy efficiency mortgage, which pays for home improvements designed to lower their energy consumption and leads to a reduction in the overall carbon emissions associated with the energy used in homes.

For new home purchases, the cost of energy efficiency investments is added to the loan balance so that borrowers can pay for those investments over the life of their loans, as well as deduct the interest from their federal and state income taxes.

Participating lenders also offer borrowers additional financial benefits above and beyond the value of the home energy savings including discounted mortgage rates, reduced loan fees and assistance with closing costs.

In terms of whether it's smart to participate in such a program, that's totally subjective. To the extent that such programs allow homeowners to reasonably lever themselves, with energy (money) saving tricks in place, it could be no worse (and perhaps better in terms of cost) than any traditional loan program. If you are able to borrow a reasonably low amount and not over-extend yourself, an energy efficient/ENERGY STAR mortgage may make sense.

One caveat: The incentive to go into debt to pay for a home improvement project that you could otherwise pay for with cash, may not be a good idea. For the same reason one should always be wary when offered the opportunity to add a high-end refrigerator or high-end stove to your mortgage when you buy a home... namely, you will pay MUCH MUCH more for that product over the life of the loan than you would have paid if you paid cash for it. However, if the energy efficiency improvements you make end up saving an equivalent amount of energy (money) each month which offsets the cost of the added interest on the higher balance loan, then it's a wash. Ideally, you would want to SAVE money by making the improvement, while not adding debt to your personal balance sheet.