Home Improvement

How to finance solar panels for your home

5 min read
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You may be wondering why more people are going solar these days, but it’s not hard to see why once you consider the financial — and environmental — benefits.

Not only can adding solar panels to your home mean never having to pay an electric bill again, but the investment can pay off in terms of increased property value. And if you’re worried about your carbon footprint, adding solar panels to your house can reduce your energy usage and impact on the planet in one fell swoop.

Unfortunately, there’s one big “gotcha” that comes with this home upgrade: Going solar isn’t cheap. The cost can even be considered exorbitant. The good news is there are IRS tax credits you can qualify for that will lighten the financial load, but you still need to find a way to pay upfront.

How much do solar panels cost?

Finding out the average cost of solar panels is the first step in the process for most people considering this option. After all, assessing the cost of the solar panel equipment plus the installation cost is crucial for families deciding if they can truly afford this investment in their home.

According to a report from the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL), most people paying for a residential system should plan on forking over between $2.70 and $3.11 per watt, data through March 2018 shows. The NREL notes that most residential rooftop systems are between 3 and 10 kilowatts in size. This means most residential systems could cost between $8,100 and $9,330 for a 3 kilowatt system. A larger 10 kilowatt panel system would range from $27,000 to $31,000.

Of course, this all depends on the type of solar panels you end up buying. There are different types of solar panels for residential systems, including gridtie systems that require a connection to your utility company, off-grid systems and gridtie systems with a battery backup. The latter option is the most expensive, but it may offer the best of both worlds. There are also different brands of solar panels to choose from, and installation costs can vary depending on where you live.

How much money can you save by going solar?

Spending up to $30,000 and potentially more for a solar upgrade may seem insane. However, it’s not hard to see how this investment could pay off in the long run just in terms of eliminating electrical usage.

According to data released by the U.S. Energy Information Administration in October 2018, the average monthly electric bill varied nationwide from a low of $81.65 in Utah to $149.33 in Hawaii.

When tracking bills by region, average monthly electric bills worked out to:

  • New England: $116.97
  • Middle Atlantic: $106.79
  • East North Central: $99.50
  • West North Central: $107.75
  • South Atlantic: $125.15
  • East South Central: $126.58
  • West South Central: $118.79
  • Mountain: $100.03
  • Pacific Contiguous: $101.21
  • Pacific Noncontiguous: $140.78

The total average for the entire United States worked out to $111.67 per month at last count, so we’ll use that as a basis to see how much you could save.

That monthly amount — which you may never pay again — works out to $40,201 over 30 years. So, depending on where you live and the tax incentives you take advantage of, your total electricity savings could exceed the cost of your solar panel installation, as long as you stay in the home long enough.

To get a good idea of what solar panels might cost you (and save you) given your home’s specific location, try using the Project Sunroof tool from Google. Just enter your address, and you’ll see the projected solar paneling costs for your specific property, as well as your expected savings over time. It will also break down the environmental impact your installation could have.

Tax credits that can reduce solar installation costs

If you act fairly quickly, federal tax credits can also help reduce how much solar panels cost. Through the end of 2020, you can receive a 26 percent federal tax credit for the cost and installation of a qualifying solar system. The credit drops to 22 percent for the tax year 2021, but that’s still a big chunk of money considering the high costs involved in solar installation.

To qualify for the credit, your solar system must be installed in a home you own and use as a residence. Rental properties don’t qualify for this credit, but second homes and vacation homes do. The solar system you install must also provide electricity for the house, and it needs to meet all state and federal requirements in terms of fire and electrical codes.

There may also be statewide and city-based incentives you can take advantage of, including valuable rebates and more. To see what’s available in your area, check out the Database of State Incentives for Renewables & Efficiency.

Three ways to finance solar panels

You can absolutely finance your solar panel installation cost with cash up front, but there are ways to borrow the money if you want to pay it off over time. Taking out a home improvement loan can help you stretch the payments on your investment out over several months or years. It can also help you “front” the money while you wait for federal tax credit money to head your way.

Personal loans

By and large, the best way to finance a solar project is probably with a personal loan. Solar loans come with fixed interest rates and a fixed monthly payment that will never change through the entire life of the loan. They also typically mean faster access to cash (sometimes as little as a day or two), and many come with no origination fees.

The best part? personal loans for solar systems are unsecured, so you don’t have to put your home up as collateral or have a ton of home equity to qualify.

Home equity loans and HELOCs

If you have a lot of equity in your home and prefer to borrow against it, you can also consider a home equity loan or a home equity line of credit, or HELOC. Home equity loans work line personal loans, as they have fixed interest rates, a fixed repayment timeline, and the same monthly payments.

HELOCs, on the other hand, give you a line of credit you can borrow against similar to a credit card. With HELOCs, you’ll typically have a variable interest rate, which means your payment could go up or down as your account balance and rate fluctuates.

These two loan options let you use your home as collateral, but you can typically only borrow up to 85 percent of your home’s value across a first mortgage and second loan. The home equity requirement for these loans limits the number of people who can go this route.

In addition to needing a lot of home equity to qualify, home equity loans and HELOCs come with an application process that is more involved. You may, for example, have to get your home appraised to qualify. On the flip side, they can also come with low interest rates and fair terms for consumers with good or great credit.

FHA and Fannie Mae loans

There are also two types of mortgage loans — the FHA 203(k) loan and the Fannie Mae HomeStyle loan — that can help you finance both the purchase of a home and the installation of solar panels and other upgrades simultaneously. You can also use these loans to refinance your existing mortgage and pay for your solar upgrades that way.

The bottom line

Going solar can help you reduce your environmental impact as well as your household operating costs. And with valuable federal tax credits available (at least through 2021), you can lessen the up-front costs of installing them, too. 
If you need more help financing your solar panel installation, a handful of solar loan options can help you do it. Just make sure to compare all your financing options — as well as the rates and terms they come with — before you decide.

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