How Do I Finance Solar?

The idea of residential solar upgrades can seem complex and expensive. Even though we all would love to find ways to lessen our energy usage and lower our monthly power bill, not everyone realizes that there are multiple financing options available to make the switch to solar accessible.

Homeowners just like you can take advantage of solar loans, home equity loans, and more to fund the purchase of residential solar components. Financing your switch to solar is easy when you understand all the options available to you.

Solar Financing Options

1. Home Equity Lines of Credit or Home Equity Loans
2. Personal Loans: Secured and Unsecured
3. Secured Solar Loans
4. Solar or Green Mortgages/Refinances
5. Solar Leases
6. Power Purchase Agreements
7. Cash

Home Equity Lines of Credit and Home Equity Loans

Home prices have recently skyrocketed, and a home that was purchased for $300,000 dollars in 2017 may now be valued at over $800,000. What exactly do home prices have to do with solar? Well, this article is called “Solar Financing 101”, and home prices are directly correlated with home equity.

What exactly is home equity? In simple terms, it is the total fair market value of your home, minus the remaining amount owed on your mortgage loan. What you get from this calculation represents the value (or equity) that you have earned by making payments on your mortgage loan.

If you already own a large amount of equity in your home, you may want to consider taking out a home equity loan or line of credit. Both options allow you to borrow against the equity in your home and can be used as an easy way to finance your solar energy investment.

Accessing the funds available from your home’s equity is related to another mathematical equation. If your mortgage loan has been paid down to the point where the value of the home is greater than the outstanding loan balance, you can borrow a percentage of that difference, or equity, generally up to 85% of your total home equity.

If all this is still not totally clear, don't worry! You aren’t alone. It's definitely confusing if you're not used to it. Let’s use the example from above to provide more details on how this financing option works.

Home Equity Example 

1. Sally’s home was purchased in 2015 with a mortgage loan of $300,000. Since the home purchase date, home prices have dramatically increased in the area where Sally lives.
2. Sally has never missed a house payment. Thanks to her, the monthly payments have brought the balance of Sally’s mortgage loan down to $250,000.
3. Sally is obsessed with HGTV, DIY projects, and anything related to updating her home. She is consistently making home improvements and is passionate about reducing her carbon footprint with renewable energy sources.
4. Sally hears through the neighborhood grapevine that her neighbor, Lisa, recently installed solar panels on her home by leveraging the equity in her home. Sally is confused. How did Lisa have equity in her home when Lisa’s yard was the smallest on the street and they hadn’t made any updates to the property since they bought the house, which was after Sally had bought hers?
5. Sally runs into Lisa at the grocery store and finds out the home prices in their neighborhood have tripled. To buy her exact house today (before any improvements) would cost over $900,000!
6. Sally learns from Lisa that she can easily tap into the equity of her home. Given Sally’s home is now valued at $950,000 and the balance of her mortgage is only $250,000, she has access to $700,000 in home equity value.

Home Equity Loan v.s. Home Equity Line of Credit (HELOC)

Because home equity loans and lines of credit are secured by the equity in your home, they typically are offered at lower interest rates than personal loans, credit cards, and other unsecured debt. This makes them a great option for your solar investment.

By using the home equity finance option, you will own the solar upgrades outright from the very start. When you purchase your solar equipment outright, you can take advantage of tax incentives that aren’t available to those who lease solar energy systems.

In Summary

1. Home equity loans and HELOCs are loans based on the equity in your home.
2. With a home equity loan option, you'll receive a lump sum of money that you'll have to repay in fixed payments (that includes a fixed interest rate) for the term of the loan.
   1. The interest for this type of loan is typically higher than a HELOC and it remains consistent throughout the duration of your loan repayment, regardless of your balance due since the interest for the loan is built into each monthly payment.
3. A HELOC establishes a revolving line of credit that acts much like a credit card.
   1. You can tap into your equity as needed, up to a certain preset credit limit.
   2. HELOCs have a variable interest rate, and the payments are not usually fixed.
   3. Your minimum payment will vary according to the amount you have borrowed and the variable interest rate for the month.
   4. Monthly minimum payments are typically lower with HELOCs since they are calculated according to the interest owed.
   5. You can max out your home equity line of credit (not recommended) as long as you continue to make interest payments.

Pros

• Own your solar energy system outright
• Save more with tax incentives and rebates
• Access lower interest rates
• Gain quick access to a revolving line of credit (with a HELOC)
• Works for less-than-perfect credit
• Offers longer financing terms, which may result in lower monthly payments

Cons

• Uses your home as collateral
• Offers variable interests rates (with a HELOC), which may result in fluctuating monthly payments
• Reduces the equity you have in your home

Personal Loans: Secured and Unsecured

A personal loan—offered by many online lenders, credit unions, and banks—is a great option for those who have good credit and want to own their solar upgrades and leverage the tax incentives.

With a personal loan, you have the option of an unsecured loan or a secured loan. An unsecured personal loan means that the lender is giving you a lump sum of money in good faith that you'll repay it. You'll be responsible for paying a fixed monthly payment for a set term.

A secured personal loan is very similar to an unsecured one. The main difference is you'll have to pledge collateral for a secured personal loan. The type of collateral used varies greatly and depends on what you have available to offer as collateral (e.g., using your vehicle title as collateral).

Using a secured personal loan to finance your solar investment is likely to have a lower interest rate when compared to an unsecured loan, because the lender has something of value (your collateral) to compensate for any lost funds if, for whatever reason, you're unable to repay the loan.

In Summary

Personal loans can be very simple because they're set up with a fixed monthly payment, term, and interest rate.
Individuals who have good credit are most likely to be approved for a personal loan.

Secured and unsecured personal loans may have a higher interest rate than other solar financing options and can be difficult for individuals with less than perfect credit to obtain without offering collateral.

Pros

• Own your solar energy system outright
• Save more with tax incentives and rebates
• Offers access to quick financing (with good credit)

Cons

• Offers higher interest rates
• Offers shorter financing terms, which result in higher monthly payments
• Creates an opportunity for your collateral to be repossessed if your secured loan goes into default

Secured Solar Loans

Another popular loan to obtain the value of solar in your home is a secured solar loan. With this type of loan, you'll be pledging your new solar panels as collateral for the loan. This is very similar to what you would find with a vehicle loan, where you have to utilize the vehicle as collateral. In the event that the bill isn't paid, the solar panels may be repossessed by the lender.

When you opt for a secured solar loan, you typically can get lower interest rates than unsecured loans by pledging collateral. This can be a great option for those who have less than perfect credit and those who are experiencing difficulty getting funded with other types of loans.

Pros

• Offers low interest rates
• Works for less-than-perfect credit, with high approval rates
• Offers longer financing terms, which may result in lower monthly payments

Cons

• Requires your solar energy system be used as collateral
• Prohibits your use of solar tax rebates and incentives
• Assigns ownership of your personal solar system to lender, until the solar loan is repaid in full
• Creates an opportunity for your solar panels to be repossessed if your secured solar loan goes into default

Solar or Green Mortgages

Wrapping the cost of solar panel upgrades into the overall mortgage of your home isn't difficult to do with a solar or green mortgage. If you're thinking of purchasing a new home, you can apply for a solar mortgage which will allow you to borrow a secondary amount to pay for the solar upgrades you want. The lender will take the perceived value of your home after the solar upgrades to determine what you're eligible for.

Solar or green mortgages are ideal for allowing you to retain a low interest rate and get the funding you need for your solar upgrade. If you already own an existing home that has a mortgage on it, you may consider doing a solar or green mortgage refinance. This will essentially take out a new mortgage on your house for the amount of your solar upgrades and your initial mortgage combined. Just as you did with your previous mortgage, you'll be set up to pay a fixed amount of money or pay for a set period of time at a specific interest rate.

Pros

• Simple financing for home purchases
• One convenient monthly payment
• Tax incentives and rebates

Cons

• Using home and solar energy system as collateral
• Locked into long repayment term

Solar Leases

Another option to get the value of solar in your home is to establish a solar lease with a reputable company. With this type of arrangement, you can have solar equipment installed in your home and can rest assured that any maintenance issues that will need to be handled will be the responsibility of the installation company. However, with a solar lease, you actually do not own the solar equipment. Rather, you're essentially renting the equipment. While this is great to make power personal at your home, it doesn't work to give you the added home value of solar upgrades.

Pros

• No upfront costs
• No maintenance fees

Cons

• You don’t own the solar energy system
• Provider can opt to not renew the lease after your term ends
• No tax incentives or rebates

Power Purchase Agreements

Solar power purchase agreements (PPAs) are a great option that can help you to reduce your energy bills without having to worry about any of the design, permitting, or installation of the residential solar system. With a PPA, the solar company will come to your home and install a solar energy system. All the energy that is produced from that system will be directly sold to you at a per-unit price. This per-unit price is typically lower than paying for electricity from your existing power company.

As a PPA customer, you get to enjoy a lower price on your energy usage for a set period of time. The solar company, on the other hand, gets to enjoy the tax incentives that come along with the installation of a new solar energy system. Most PPA agreements are signed for between 10 and 25 years. In many cases, you may renew your PPA contract at the end of your term if you so choose. Additionally, your solar energy company can offer you the chance to buy the solar energy system at the end of your contract term so that you can enjoy the added home value of solar.

This can be a great option if you're just looking into reducing your energy bill without having any long-term financial commitment. Solar power can help drastically reduce your need for power, and you can simply replace your monthly power bill with a much smaller solar panel lease payment.

Pros

• No rate hikes
• No upfront costs
• No maintenance or upkeep costs required

Cons

• No tax incentives or benefits
• Don’t own the solar energy system

Cash

As with any home upgrade, you can decide to pay cash for solar. The actual cost of having solar installed in your home is going to vary depending on a number of different factors like your home's square footage and energy needs. By paying cash upfront for your solar upgrade, you can enjoy owning the system outright. This means that you can take advantage of all the tax incentives that are out there for solar homeowners. Additionally, you won't have to worry about a monthly payment or a repossession of your solar panels if you default on your loan agreement.

Pros

• You own the solar energy system outright
• No financing payments required
• Enjoy tax incentives and rebates

Cons

• High upfront cost
• You’re responsible for proper maintenance

The Constant Power Bill Problem

If you're like most homeowners, you likely dread opening your power bill. Alongside a mortgage, the next highest expense for the average homeowner is their power bill. At times it can seem like it's never-ending. When you're constantly relying on your power company to provide you with some of your most basic needs, like hot water and air conditioning in the summer, you're stuck in a one-sided relationship.

Your power company can increasingly hike up the price of the energy they provide you, and you're stuck having to deal with it. Even worse, they tend to tack on more fees every few months. They slowly eat away at your monthly budget until other things need to be cut out. Fortunately, when you switch to solar, you have the option of providing that much-needed power for your home at a much lower cost to your budget.

Advantages of Going Solar

As you learn about all these financing options that are available to you for solar upgrades, you start to learn the value of solar. Residential solar power can help make power personal for your family. You can enjoy so many different advantages when you take the leap to invest in solar for your home.

No Price Hikes

One of the biggest problems that homeowners have with their electricity bill is that it can drastically change from month to month. When you make the decision to go solar, you can take care of your own energy needs without having to pay the power company. If you choose to finance your new solar energy system, you're set up with a specific monthly payment amount that won't ever go up. Eventually, you'll pay off the loan and will completely own your power.

Enhance Your Home’s Value

When you decide to have solar installed, you're investing in a product that enhances the overall value of your home. If you sell your home in the future, homeowners are more likely to pay extra to enjoy the benefits of having solar power over being responsible for an energy bill every month. When you enhance the value of your home, you can boost your equity and overall net worth.

Tax Benefits

Another great benefit of going solar at your home is that you can take advantage of the various tax benefits that are out there. The federal government offers its own group of tax incentives and rebates for homeowners who invest in solar energy systems. You can even enjoy more tax benefits at the state and local levels, depending on where you live.

Eco-Friendly Contribution

Apart from lowering your energy bill and helping to hedge against rising prices, upgrading to solar energy allows you to contribute to a more eco-friendly world. Solar panels produce energy without any harmful emissions. You can work to reduce your family's carbon footprint and be an inspiration for other homeowners to do the same. A more eco-friendly world starts with some brave and smart individuals taking a stand in their everyday lives.

Power vs. Solar Price Comparisons

While the concept of going solar and being more eco-friendly can be great, the real power of upgrading your home to solar comes down to the actual price comparisons between what it's going to cost you and what it's going to save you. The average cost of installing solar in a U.S.-based home is around $18,000. It's important to know that the cost of your system will largely depend on the size of your home, your energy needs, and other considerations.

For simplicity purposes, let's say that you finance your residential solar purchase. At an average solar loan term of 25 years and a viable interest rate of 4%, you can expect your monthly payments to be about $95.00 per month. Once the 25-year loan period is up, you'll own your solar energy system free and clear and can start enjoying cost-free energy for your home. Of course this is just one of many financing possibilities you can undertake.

It's been estimated that the energy cost for the average home in the United States is around $130.00 per month. This cost is going to vary depending on where you live, the rates in your area, and so forth. When you compare the cost of a monthly energy bill of $130.00 with that of the cost of a monthly payment on a new solar energy system of $95.00, you'll note a big difference.

It generally costs less to have a steady monthly payment on a solar energy loan than it is to pay your power company for the energy that your household uses. The best part is that your monthly bill won't change when you're financing a solar energy system. However, when you're paying the power company for energy, your bill will continue to change for a multitude of reasons, like price hikes or higher energy usage during the summertime and wintertime.

Get Expert Help Today!

There's no denying the fact that doing a large home upgrade like adding solar can be a bit complex for the average homeowner. Fortunately, we have a variety of experts who are available to help guide you during the financing process to determine what specific financing options are best for your family and your budget. Be sure to reach out to one of our financial experts today to discover how solar energy can work for your home!