low-cost financing: overview » introduction » low-cost loans
Goal: Improve Residential Energy Efficiency
Policy: Provide Low-Cost Financing

Provide Interest Rate Buy-Down Programs and Other Low Cost Loans
Some states offer loan programs that provide financial assistance on favorable terms to help cover the up-front costs associated with energy-efficient construction or retrofits. Loans for achieving greater energy efficiency may be marketed to owners of existing homes and multifamily properties for making energy improvements and upgrades or to builders and developers of new homes, depending on local objectives, and may or may not be targeted on low-income families. Qualifying activities vary from state to state, with some areas limiting eligibility to specific measures or technologies while others offer more general requirements related to energy performance. In other cases, borrowers undergo a home energy audit, which identifies recommended upgrades.

As with other incentives programs, the capital for an interest rate buy-down or other lending program can come from a variety of sources, including federal weatherization and energy efficiency programs, revenue collected from public benefit funds, and, less commonly, state and local bond issues and appropriations. In some cases, lending programs can be designed as revolving loans, so that repayment helps to capitalize the next round of loans. Unlike a rebate or tax credit, the money must be repaid; however, borrowers typically benefit from low-cost financing achieved through below-market fixed interest rates, interest rate buy-downs, or other arrangements that states offer in conjunction with private lenders.

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Interest rate buy-down programs

Interest rate buy-down programs make it more affordable for borrowers to finance energy-efficient improvements through public subsidies that reduce interest rates on loans issued by participating lenders. Several states have implemented energy-efficiency interest rate buy-down programs, including New York, Louisiana, and Alaska, offering repayment periods ranging from one to 15 years and interest rate reductions from 25 to 650 basis points (100 basis points = a one percentage point reduction, i.e,. from 6 to 5 percent). [1] Some of the considerations relevant to designing a program of this nature include:
  • Amount of interest rate reduction -- Interest rates may be reduced by a fixed amount (i.e., 200 basis points below the normal interest rate) or an amount that varies depending on the scope of the proposed improvements. For example, owners of existing homes who participate in Alaska's Energy Efficiency Interest Rate Reduction Program can receive incrementally larger interest rate reductions depending on the level of efficiency achieved. Energy ratings conducted before the project is initiated and after completion must be submitted to the loan servicer.
  • Period of the buy-down -- Most programs limit the interest rate reduction to no more than ten years, although the term of the loan may extend beyond that period at an unsubsidized rate. In cases where buy-downs are applied to longer-term loans, borrowers should be made aware about potential increases in their monthly payments.
  • Identification of an energy-efficiency standard -- States or communities that implement performance-based interest rate reductions need to identify a minimum standard against which residential energy efficiency can be measured. States or localities that have adopted an above-code rating energy system may wish to use the rating tool criteria.

Potential barriers to adoption of interest rate buy-down programs

  • Program complexity -- The complexity of an interest rate buy-down program that offers multiple tiers of reductions could render such programs difficult to administer, posing a barrier to participation by financial institutions. [2]
  • Risk of default -- Where the rate reduction ends prior to the term of the loan, borrowers' payments will increase when the subsidy stops. Proper education and notice can help to prevent default.
Solutions in Action

Photo credit: Todd France Photography, courtesy of Common Ground

The New York Energy Smart Loan Fund program, one of many programs administered by the state's Energy Research and Development Authority (NYSERDA), provides an interest rate reduction on loans from participating lenders used to finance energy-efficiency measures and renewable technologies.

In most parts of the state, borrowers can receive a reduction of 4 percent (400 basis points) below the normal market interest rate over a 10-year loan period. Partnering banks receive a lump sum payment in the amount of the subsidy when the loan closes, with project funding coming through a public benefit fund administered by NYSERDA.

Owners of existing single-family homes may receive loans of up to $20,000 ($30,000 for Con Ed customers); owners of existing multifamily buildings are eligible to receive $2.5 million ($5,000 per unit) plus an additional $2.5 million for projects with advanced meters that help reduce peak-load energy use. Developers of new multifamily construction are also eligible to participate in the program and may receive loans up to $1 million plus an additional $500,000 for Green Building Improvements when the building achieves LEED certification.

All improvements financed by the program must be included on the program's Eligible Measures List and, with the exception of appliance installation, must be completed by a pre-approved contractor.
Notably, New York's Energy Smart Loan Fund, which offers
interest rate reductions for a term of up to ten years, has a
zero percent default rate.
  • Current credit environment -- Interest rate buy-down programs do not, on their own, make it easier for borrowers to obtain financing. In the current market, households with limited income or blemished credit could have difficulty qualifying for a loan, leaving them unable to take advantage of this program.

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Low-interest loans

Many states offer low-interest loan programs that support energy-efficiency upgrades in privately-owned single-family or multifamily buildings. These programs are often administered by private nonprofit organizations acting on behalf of a state agency. Program administrators assume responsibility for originating the loans, rather than buying down interest rates on products offered by participating lenders.

For example, the nonprofit Center for Energy and Environment administers two rental rehabilitation programs in Minnesota in cooperation with the state's Department of Commerce and Housing Finance Agency. The Rental Energy Loan Fund, offered with the Department of Commerce, provides short-term (5-year) low-interest loans up to $10,000 to the owners of rental properties to help pay for renovations that increase the energy efficiency of their buildings. Eligible activities include replacement or repair of heating systems and water heaters, installation of insulation or storm windows and doors, and high efficiency lighting. The Rental Rehabilitation Loan Program, offered with the Housing Finance Agency, provides loans of up to $25,000 for single-family and duplex structures and the lesser of $10,000 per unit or $100,000 per structure over a longer-term (15-year) basis for energy-saving and other basic improvements.

Solutions in Action
In May 2009, the New Jersey Housing and Mortgage Finance Agency (HMFA) announced an array of initiatives to be supported with $73.6 million allocated to the state for energy-efficiency programs through the American Recovery and Reinvestment Act. Among other initiatives, the announcement noted an $8 million low-interest loan program for energy-efficiency improvements in single-family and multifamily homes.

Households earning up to 250 percent of the area median income may apply, as well as the owners of multifamily properties that meet HMFA's affordability requirements. The agency plans to feed loan repayments back into the program in order to finance energy-efficiency improvements for additional borrowers.

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Provide interest rate buy-down programs and other low cost loans to lower borrowing costs for energy-efficient improvements

Other pages in this section:

Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance

Offer special assessment programs that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage

[1] State-Sponsored Energy Efficiency Grant, Loan and Tax Credit Programs. [PDF] 2007. Energy Efficiency Mortgage Program State Working Group Report. Washington, DC: Energy Programs Consortium.
[2] Financial Interventions to Increase Access to Commercial Credit in Developing Economies. [PDF] 2004. Washington, DC: TCG International LLC.