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Economic, Financial and Real Estate Terminology

Terms and Definitions

Certain terms are consistently used in the fields of building energy efficiency and financial and economic analysis. Energy Raters must be familiar with the terminology of both fields to properly discharge their function as energy auditors and to understand the financial implications of the recommendations they make to their clients. For ease of reference the two fields have been segregated, then alphabetized below. In a few instances a term has been included in both sections. 

The following terms are basic to understanding and using energy ratings in the financial marketplace. 

• Adjustable Rate Mortgage: A secured loan in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
• Analysis with Replacement: An Improvement Analysis that includes the replacement cost of energy-efficient equipment whose useful life is exceeded during the analysis period. The cost of replacing the energy-efficient equipment, escalated at the general inflation rate, is added to the periodic cash flow stream the period following the end of its useful life.
• Appraisal or Appraised Value: An estimate of the value of property, made by a qualified professional called an "appraiser." 
• Assessment or Assessed Value: The value placed on real property (a building and its grounds) by the local property tax authority. 
• Cost/Assessment: The ratio of the cost (or appraised value) of a building with respect to its assessed value.
• Cash Flow: Periodic money stream(s) resulting from an economic decision that are expected to continue into the future. For example, rent payments, mortgage payments, taxes, etc. By convention, incoming cash flows (revenues) are positive and outgoing cash flows (payments) are negative.
• Cash Flow Schedule: A table of cash flows that includes each of the periodic money streams associated with an economic decision.
• Current Salvage: The salvage value of an existing home measure that will be replaced with a more efficient measure. Typically this value will be zero. However, for example, if an air conditioner is replaced with a more efficient one and the original unit has a useful life and can be sold for $300, then $300 is the Current Salvage value. 
• Debt-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's total monthly payment obligations on long-term debt are divided by their gross monthly income. This is one of two ratios (housing expense-to-income ratio being the other) used by the mortgage industry to determine if a prospective borrower qualifies (meets the underwriting guidelines) for a specific home mortgage. Fannie Mae, Freddie Mac and FHA underwriting guidelines set an upper limit of 36% on this value for conventional loans but increase ("stretch") the ratio by 2% for qualifying Energy Efficient Mortgages.
• Discount Rate: The interest rate reflecting the time value of money that is used to convert cash flows occurring at different times to a common time (e.g. to convert future values to present values and vice versa). The discount rate represents the opportunity cost of money and is often selected as the after-tax rate of return on an alternative investment or the cost of borrowing money.
• ECM (Energy Conservation Measure): An individual building component or product that directly impacts energy use in a building and has a set of differentiable energy performance factors that can be arranged into a table or list. For example, wall insulation is a measure that will impact heat transfer to and from a building, and there is some list of wall measures that are differentiated by insulation R-value that define the possible walls that can be incorporated into a building.
• ECM Lifetime: The useful lifetime of an energy conservation measure. 
• EEM (Energy Efficient Mortgage): Specifically, a home mortgage for which the borrower's qualifying debt-to-income and housing expense-to-income ratios have been increased ("stretched") by 2% because the home meets or exceeds the minimum standards of the Council of American Building Officials (CABO) 1992 version of the Model Energy Code (MEC). This so-called "stretch" mortgage results from provisions of the Cranston-Gonzalez National Affordable Housing Act, and is refined by the U.S. Energy Policy Act (EPAct) of 1992. The EEM is nationally underwritten by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). NOTE: This term is often used generically to refer to any home mortgage for which the underwriting guidelines have been relaxed specifically for energy efficiency features, or for which any form of financing incentive is given for energy efficiency.
• EIM (Energy Improvement Mortgage): A home improvement mortgage that is given specifically for energy efficiency improvements to the property. 
• End of Life Salvage: The salvage value of a measure at the end of its useful life. Typically, this value will be $0. For an economic analysis in which the useful life of a measure is not reached at the end of the analysis period, 
• Energy Savings Goal: A user-defined level of building energy efficiency.
• Fixed Rate Mortgage: A secured loan in which the interest rate has the same value for the life of the loan. 
• Fuel Price Inflation Rate: The annual increase in fuel price as a percent of its present value.
• Future Value (FV): Monies accruing in the future that have not been discounted to account for the fact that they will be worth less in the future than they are today. 
• General Inflation Rate: The annual increase in the price of goods and services as a percent of their present price.
• Housing Expense-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower's total monthly housing expenses (P.I.T.I.) are divided by their gross monthly income. This is one of two ratios (debt-to-income ratio being the other) used by the mortgage industry to determine if a prospective borrower qualifies (meets the underwriting guidelines) for a specific home mortgage. Fannie Mae, Freddie Mac and FHA underwriting guidelines set an upper limit of 28% on this value for conventional loans but increase ("stretch") the ratio by 2% for qualifying Energy Efficient Mortgages.
• Improvement Analysis: A written calculation of the cost-effectiveness of various options to improve the energy efficiency of a building, including an explicit report on the assumed financing rate and lives of the measures used in the calculation and consideration of interactions between energy-saving measures. 
• Income Tax Rate: The marginal rate at which personal income is taxed by the federal government.
• Internal Rate of Return (IRR): The present value of the net cash flow stream expressed as an annual percentage growth rate of the initial investment (i.e. the annual compound interest rate required to produce the same result as the evaluated investment).
• Loan-to-value Ratio (LTV):  The total amount of the mortgage loan divided by the appraised value of the property that secures the mortgage.
• Maintenance Cost: The cost of keeping an ECM in good operating condition.
• Mortgage Note: A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of indebtedness, and states the manner in which the debt shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment. 
• Mortgage Down Payment: Money paid by the borrower to make up the difference between the purchase price and the loan amount. 
• Mortgage Interest Rate: The price charged for borrowing money expressed as a percentage of the unpaid loan balance. 
• Mortgage Insurance Premium (MIP): The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders against loss in insured mortgage transactions. In FHA insured mortgages this represents a payment of 2.25% of the loan principle at closing plus an annual rate of one-half of one percent paid by the mortgagor on a monthly basis. 
• Mortgage Points: A point is equal to one percent of the principal amount of the mortgage. Lenders frequently charge points for both fixed-rate and adjustable-rate mortgages to cover loan origination costs and to increase the yield on the mortgage. These points normally are collected at closing and may be paid by the buyer (borrower) or the seller, or may be split between them. 
• Mortgage Principal: The amount of money owed by the borrower to the lender, and the amount used to compute the periodic interest payments on simple interest loans. The principal normally decreases during the life of a simple interest mortgage. However, for negative amortization mortgages it will increase over time and for interest only loans it does not change. 
• Net Cash Flow: The sum of the positive (revenues) and negative (expenditures) monies accruing during each period of an economic analysis (i.e. the total revenues minus the total expenditures for each period of the economic analysis, normally expressed in future value dollars). 
• Net Present Value (NPV): The present value of all saving (revenue) streams less the present value of all cost (investment) streams. 
• Optimization: A energy analysis and economic evaluation process that seeks to determine the most cost-effective means of achieving a stated energy-efficiency or energy use goal. 
• P.I.T.I.:  An abbreviation which stands for principal, interest, taxes, and insurance. These generally represent a borrower's total monthly payment obligations on a home loan. The taxes and insurance portion are paid monthly to an impound or escrow account and may be adjusted annually to reflect changes in the cost of each. 
• Present Value (PV): Monies accruing in the future that have been discounted to account for the fact that those monies will be worth less in the future than they are today. 
• Present Worth (PW): The same as Net Present Value (NPV). The present value of all saving (revenue) streams less the present value of all cost (investment) streams. 
• Private Mortgage Insurance (PMI):  Insurance that protects a lender from loan losses in the event of default. In most cases, PMI is used to insure the amount of a loan in excess of an 80 percent loan-to-value ratio (LTV). 
• Property Tax Rate: The rate at which real property ownership is taxed by the local ad valorem taxing authority. 
• Ranking Method: The economic criteria by which energy conservation measures are ordered.
  • Simple Payback -- will minimize the added first costs for the improvements with respect to the achieved energy savings.
  • Net Present Value of Savings -- will maximize the net present value (present worth) of the energy savings over the life of the mortgage or other specified period.
  • Savings to Investment Ratio (SIR) -- will maximize the net present value of energy savings with respect to the net present value of the added first costs (investment) over the life of the mortgage or other specified period.
  • Internal Rate of Return on Investment (IRR) -- will maximize the rate at which the added first costs (investment) for the energy-efficiency improvements return savings over the life of the mortgage or other specified period.
  • 1st Year Cash Flow based on Mortgage -- will maximize the net first year cash flow to the home owner as a function of the mortgage term and interest rate.
• Savings: The reduction in operating (energy) cost that results from an improvement in building energy efficiency. 
• Saving to Investment Ratio (SIR): The ratio of the present value of an energy saving stream with respect to the present value of the cost of making the energy efficiency improvements. 
• Simple payback: The number of years needed to pay for energy efficiency improvements using the energy cost savings that accrue annually from those improvements. The initial cost of the improvements divided by the annual energy cost savings from those improvements. 
• Upgrade Cost: The price that must be paid to install an energy conservation measure into a building. If the building is "new" (i.e. has not yet been constructed), then the cost is equal to the cost of the improved measure minus the cost of the minimum standard measure. If the building already exists, then the cost is equal to the cost of the measure minus the current salvage value for the existing measure. 
• Underwriting Guidelines: The set of procedures and criteria used by lending institutions to determine if it is in their best interest to originate (primary lenders) or purchase (secondary lenders) a specific mortgage.