Home Improvement

Financing solar panels 101

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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, but 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.

Unfortunately, solar equipment isn’t cheap. Though costs have been coming down in recent 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 up front.

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 $2.85 per watt for the first half of 2020. Meanwhile, the average size of a residential photovoltaic (PV) power installation is about 5 kilowatts, according to the Solar Energy Industries Association (SEIA).

The final cost you’ll pay, however, also depends on the type of solar panel system you buy. There are different types of residential systems, including grid-tie systems that require a connection to your utility company; off-grid systems that are not connected to the local utility company, and grid-tie systems that include a battery backup. 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 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 is $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 an 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 property, as well as your expected savings over time. It will also break down the environmental impact your installation could have.

Tax benefits of solar panels

The federal tax credit for solar panel systems installed before the end of 2022 is 26 percent. The rate will fall to 22 percent for projects completed by the end of 2023 and expire in 2024 unless Congress renews it.

To qualify for the tax credit, your solar system must be installed in a primary or secondary residence. Rental properties don’t qualify for this credit, but second homes and vacation homes do. In addition, you must have purchased the solar PV system (either with cash or through financing). The tax credit is not available for systems that you’re leasing from a solar system provider and will never own.

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

How to finance solar panels

You can absolutely pay for your solar panel installation 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 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 type of solar panel financing is probably a personal loan. Solar loans come with fixed interest rates and fixed monthly payments that never change during the life of the loan. They also typically offer faster access to cash — sometimes in 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.

Best for: Financing a solar panel purchase with a personal loan may be a good option for those who need the loan proceeds quickly and for borrowers who have solid credit scores and thus will likely qualify for the most competitive interest rates.

A personal loan can also be a good choice for borrowers who’d like to avoid the home appraisal and closing costs typically associated with other forms of financing, such as a home equity loan, says Steve Sexton, financial consultant and CEO of Sexton Advisory Group.

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, fixed repayment timelines 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 interest rate fluctuate.

These two loan options let you use your home as collateral, but you can usually 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 requiring a lot of equity, 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’re able to use your home equity and have good or great credit, the financing will usually have a low interest rate and fair terms.

Best for: Home equity loans and HELOCs make sense for someone who has sufficient equity in their home and has determined that solar panels are likely to bring added value to the home, Sexton says.

FHA and Fannie Mae loans

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

It’s worth noting that the Fannie Mae HomeStyle Renovation loan allows as much as a 97 percent loan to value ratio, making it easier to qualify for than some other loans. The loan-to-value ratio is the amount of money you’re borrowing, or loan principal, divided by how much the property you want to buy is worth, or its assessed value.

“This allows the home buyer to qualify for a larger mortgage. It is easier to qualify for this loan, especially for first time homebuyers,” Sexton says.

Best for: The FHA and Fannie Mae loans work best for those who may be purchasing a home and simultaneously seeking to have the solar panels installed.

Final considerations

Keep in mind that there are many options and variables to consider when installing solar panels on your home, so it’s important to research thoroughly and understand what you’re buying. You’ll also want to shop around for competitive pricing and financing, says Michael Foguth, president and founder of Foguth Financial Group.

“When you’re shopping for the solar panels, the company that you’re working with should also be able to guide you to loan options,” Foguth says.

In addition, it’s always a good idea to crunch the numbers and make sure the investment makes sense and will ultimately pay off for you financially.

“Make sure there is a break-even point either in reduced electric bills or significant home value increase to offset the investment,” Sexton says.

Next steps

Solar panels offer reduced utility costs and the environmental upshot of generating renewable energy, but do your homework before committing to such a large project. You may even consider talking to people who have already installed solar panels to get their reviews of the systems they selected, or any valuable insights or recommendations.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."
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