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 increase property value.

Unfortunately, solar equipment isn’t cheap. You may pay anywhere between $17,127 and $32,079 to have solar panels installed in your home. The good news is there are several financing options to help make the cost more affordable.

How much money can I 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 the most recent 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. 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 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.

Best ways to finance solar panels

If you don’t have the cash on hand to cover the total cost of solar panels, consider these options.

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.

Key benefits

Personal loans typically offer faster access to cash — sometimes in as little as a day or two — and many come with no origination fees. Also, personal loans are unsecured, so you don’t have to put your home up as collateral or have a ton of home equity to qualify.

Key drawbacks

To qualify for the lowest rates, you’ll need good or excellent credit. If you don’t have the best credit, you may get stuck with sky-high interest rates that make financing solar panels expensive. Depending on the lender, you might also have to pay late fees, insufficient fund fees, and other fees.

Who this is best for

Financing a solar panel purchase with a personal loan may be a good option if you need the loan proceeds quickly. It may also make sense if you have solid credit scores and will likely qualify for the most competitive interest rates.

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.

Key benefits

If you are able to use your home equity and have good or great credit, home equity loans and HELOCs will usually come with low interest rates and fair terms. Another perk is that you may be able to deduct the interest you pay on them and save money on your taxes.

Key drawbacks

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. In addition, home equity loans and HELOCs come with an application process that is more involved than the one for personal loans.

Who this is best for

Home equity loans and HELOCs are a good choice if you have sufficient equity in their home and determined that solar panels are likely to add value to it. These financing options are also worth considering if you don’t qualify for a personal loan with a good rate because of your credit.

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.

Key benefits

Because the Fannie Mae HomeStyle Renovation loan allows as much as a 97 percent loan to value ratio, it’s easier to qualify for than some other loans. Also, you can use either of these programs to refinance your existing mortgage and pay for your solar upgrades, too.

Key drawbacks

Compared to alternatives like personal loans, home equity loans, and HELOCs, the FHA 203(k) loan and the Fannie Mae HomeStyle Renovation loan come with higher interest rates. Fees and closing costs are usually higher as well.

Who this is best for

The FHA and Fannie Mae loans may be the way to go if you’re purchasing a home and wish to have solar panels installed simultaneously. It can also be smart choice if you aren’t eligible for personal loans with good rates.

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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