Types of Financial Resources
You know that energy upgrades to your home make sense in the long run. The savings from reduced gas and electric bills will more than pay for the improvements over the life of the products. However, like many of us, you may have a tight budget, and may not be able to afford the extra cost of a high-efficiency product or have all the money to make desired improvements.
We can help. There are a number of resources available to assist homeowners in making their homes more energy efficient. Some of these directly reduce the cost of purchasing efficient products, while others help you finance the improvements over time at low interest rates.
Incentives & Rebates
An incentive or rebate is intended to encourage homeowners to choose an efficient product by reducing its cost or helping to pay for a service. Often times, incentives or rebates will make the cost of an efficient product comparable to a traditional, less efficient product. Incentives or rebates are most commonly offered by your utility. In Illinois, state law requires all the public utilities to fund energy efficiency programs, through which they offer a variety of incentives and rebates. Additionally, the Illinois Department of Commerce and Economic Opportunity has a number of programs to help lower-income families increase their homes’ efficiency and reduce their energy bills. Energy Impact Illinois offers limited incentives, as do other organizations. We have compiled a list of incentive and rebate programs for our region and present them in our Find Energy-Saving Actions tool.
Note that incentives paid directly to the homeowner may be considered “income” by the IRS. You may wish to consult with your tax advisor if you receive an incentive or rebate to determine its tax treatment.
Certain energy efficiency upgrades you make to your home may be eligible for a tax credit or deduction. These credits or deductions reduce the amount of money you may owe the government in taxes. The value of the credit or deduction may depend on your specific tax situation and you should consult with a qualified tax advisor to discuss your situation.
By financing (taking out a loan to pay for) energy efficiency upgrades to your home, you are able to pay back the cost of the upgrades over time. In some cases, the savings from your energy bills may even be enough to cover the loan payments, really allowing the upgrade to pay for itself.
Of course, you want to be careful when choosing a loan. There are a wide variety of loan options available, and what is best for you will depend on how much money you are borrowing, your credit score and income, and whether or not you have equity in your home. The two main types of loans are unsecured or secured loans.
An unsecured loan is one that does not require any collateral. Most credit or store cards are unsecured. The bank or lender just obtains your promise that you will repay the loan. When offering an unsecured loan, the lender will usually look at your credit score or credit history and your ability to repay the loan (having adequate income). The advantages to unsecured loans are that they often require minimal paperwork with quick approvals and may be offered for small amounts of money. However, unsecured loans almost always have higher interest rates than secured loans, and may not be available for large amounts of money.
Some homeowners choose to finance their energy upgrades using a credit card, a form of an unsecured loan. Similarly many retailers offer store cards and some contractors offer special financing plans. If you are able to pay it off quickly this may be a reasonable option, but if you need more time, these often have very high interest rates that will cost you more than other options. Make sure you understand the details of any “teaser” or short-term rates. A zero percent for six months special rate may become a 24% rate if you need a seventh month or longer to pay back the loan.
Many banks and credit unions also offer unsecured loans – sometimes called personal loans or lines of credit – that you can use for energy upgrades. These are often less expensive than credit or store cards. While your own financial institution may be able to assist you, Energy Impact Illinois has partnered with a number of local banks and credit unions to offer special low rate unsecured loans for energy upgrades.
A secured loan is one in which the lender takes collateral in order to issue you the loan. Mortgages or car loans are common examples and are both secured by the asset you are financing. If you fail to pay the lender back, they have the right to foreclose or repossess your home or car to pay for the loan. Since the lender has this ability to recover money, interest rates are nearly always lower for secured loans, which is a main advantage. Additionally, secured loans are often available for the larger amount of money necessary to fund major upgrades to your home. However, since the lenders not only need to consider your credit score and ability to repay, but also the value of the asset securing the loan, there is often a lot more paperwork and time required to approve a secured loan.
Many homeowners find a home equity line of credit (HELOC) to be a good option for financing a large investment in efficiency or combining efficiency improvements with significant upgrades to their heating or cooling systems. Sometimes referred to as second mortgages, HELOCs allow a homeowner to borrow money against the value in their home for almost any purpose. In addition to having low rates, the interest paid is often tax deductible (although you should consult with a tax advisor on your situation). You must, however, have adequate amounts of equity in your home in order to qualify for a HELOC. Most banks and credit unions offer HELOCs and it is often worthwhile to shop around for the best rates and terms. Additionally, Energy Impact Illinois has partnered with a number of local banks and credit unions that offer secured loans at special low rates for energy upgrades.
If you are interested in refinancing your current mortgage, you may be interested in considering the Federal Energy Efficient Mortgage Program. This program allows you to add the cost of energy upgrades to the mortgage with favorable terms and FHA insurance. If you are combining energy efficiency work with rehabs or additions to your home, you may also be interested in what is called the 203(k) program. This Federal program allows you to refinance and pay for construction with one FHA insured loan.