Home Improvement

How to finance solar panels for your home

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Adding solar power to your home can have many financial and environmental benefits.

Not only can solar panels reduce or eliminate your electric bill, the investment can also pay off in terms of increased property value.

If you’re worried about your carbon footprint, bringing solar power to your home can reduce your reliance on nonrenewable energy and help make the planet cleaner.

Unfortunately, solar equipment isn’t cheap. Though costs have been coming down over the years, getting your house ready for a new energy source is a costly undertaking. 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 for most of the expense upfront.

How much do solar panels cost?

Assessing the cost of the solar panel equipment plus installation is crucial for homeowners deciding if they can truly afford this investment.

According to a report from the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL), the average cost of a residential solar system was $2.89 per watt in the second half of 2019.  The Solar Energy Industries Association (SEIA) says the average size of a residential photovoltaic power installation is 5 kilowatts, which would cost $14,450 at the average price.

Of course, this all depends on the type of solar panels you buy. 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?

You may get sticker shock when you see that it can cost tens of thousands of dollars to install solar power at your home, but it may still make financial sense because of the potential for long-term savings. Your investment could pay off by significantly reducing or even eliminating your power grid usage.

According to data released by the U.S. Energy Information Administration, the average monthly electric bill varied in 2019 from a low of $75.63 in Utah to $168.21 in Hawaii.

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

  • New England: $126.65
  • Middle Atlantic: $107.89
  • East North Central: $102.40
  • West North Central: $110.09
  • South Atlantic: $130.04
  • East South Central: $134.81
  • West South Central: $128.17
  • Mountain: $98.94
  • Pacific Contiguous: $100.52
  • Pacific Noncontiguous: $151.94

The total average for the entire United States worked out to $115.49, which works out to $41,576.40 over 30 years. So, depending on where you live and the tax incentives available, 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

Starting in 2021, the federal credit drops to 22 percent from 26 percent of purchase and installation costs of a qualifying system, but that’s still a significant boost for most homeowners.

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 state and city 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 pay for 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 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 (HELOC). Home equity loans work like personal loans, as they have fixed interest rates, a fixed repayment timeline and consistent monthly payments.

HELOCs, on the other hand, give you a line of credit you can borrow against like 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 equity to qualify, home equity loans and HELOCs come with an application process that is more involved than the one for personal loans. You may, for example, have to get your home appraised to qualify.

But, if you are able to use your home equity, the financing will usually have a low interest rate 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 use these programs to refinance your existing mortgage and pay for your solar upgrades, too.

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 reduce the installation costs, 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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