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Publication Date

March 2013


Chao Yue Tian, Nikhil Kaza, Roberto G. Quercia


Institute for Market Transformation

Researchers report that owners of energy-efficient homes default one-third less on their mortgages and discuss policy implications.

A study by the UNC Center for Community Capital and Institute for Market Transformation shows the risk of mortgage default is one-third lower for energy-efficient, ENERGY STAR-rated homes – a factor lenders and Congress should consider when making mortgage loans and policy.

This is the first academic study to assess the linkages between home energy efficiency and mortgage risks. Researchers examine a sample of 71,000 home loans from 38 states and the District of Columbia, all derived from CoreLogic’s mortgage database. The sample is restricted to single-family, owner-occupied houses whose loans originated during 2002-2012 and used for purchase only.

About 35 percent of the houses in the sample were ENERGY STAR-rated for efficiency, with the rest forming a control group. Controlling for other factors, the odds of a mortgage default on an ENERGY STAR residence are one-third lower than those of a home in the control group. A mortgage holder on an ENERGY STAR residence is also one-quarter less likely to prepay. Prepayment is considered a risk from the lender’s perspective, making these loans potentially more valuable to them.  Additionally, the study found that the extent of energy efficiency matters: The greater a house’s efficiency, the lower the risk of default.

The authors recommend that Congress consider the study findings in its deliberation of current and proposed legislation to improve the accuracy of mortgage underwriting. They also conclude that lenders may want to require an energy audit or rating as part of the mortgage underwriting process, and that federal housing agencies could promote underwriting flexibility for mortgages on energy-efficient homes.

American households spend around $230 billion each year on energy, not including transportation, and the residential sector accounts for 20 percent of the total energy consumed in the United States. Energy efficiency in the residential sector has a potential to save $41 billion annually, according to research by McKinsey & Company.

Topics(s): Affordable Homeownership, Housing Policy, Impacts of Homeownership, Mortgage Finance