Solar panels can be a great upgrade to your home. They can reduce your electric bill so they often pay for themselves over time. They can also increase the value of your home when it comes time to sell it.
In addition to the energy savings, you can also get a federal tax credit for 22% of the cost of a solar energy system for tax year 2021. A tax credit reduces your tax bill on a dollar-for-dollar basis, which means the government could give you a lot of financial help.
Unfortunately, solar panels can also be expensive to install. If you're planning to improve your home by switching to renewable energy, it's important to research the costs and explore your options for solar panel financing.
The cost of solar panels
According to Energy Sage, the average cost for a 10-kilowatt solar electric system is around $17,760 to $23,828. That's after accounting for the federal solar tax credits. While tax incentives help defray the cost, you have to pay the full amount for your system upfront and will later see your tax bill reduced by the tax credit when you file your returns.
That means if you want to save money on utilities with solar, you'll need to have your hands on tens of thousands of dollars to pay for your system. For most people, it's difficult to come up with that much cash all at once. As a result, you'll have to figure out how to get a loan.
Fortunately, there are a number of options available when it comes to financing solar panels.
8 ways to finance solar panels
1. In-house financing
Some solar installation companies offer to finance your system for you. However, the solar company will usually contract with a third-party lender. As a result, taking this approach is like getting a personal loan without shopping around for rates. You might pay a higher interest rate because of it.
The benefit of in-house financing is that your solar installer already has a relationship with the lender and therefore may be able to streamline the approval process. The lender already has an idea how much the system will cost so you shouldn't have a problem with loan limits. And the lender can pay the installer directly in many cases, which means you don't have to acquire an outside loan and manage the transfer of the funds.
The big downside is that the loan rates this lender charges may be higher than those you could find on your own. There's nothing wrong with considering in-house financing as an option. Just be sure you understand the terms of the loan and compare rates from other lenders to make certain you aren't paying more than necessary in interest.
2. Personal loan
Banks, credit unions, and online lenders offer personal loans to qualified borrowers. Some lenders specifically market "solar loans," but you don't have to restrict yourself only to those as that label is mostly just to catch your attention. You can get an unsecured loan from any lender that approves your loan application and you can use the money for anything you want, including solar panels.
Personal loans tend to have more affordable interest rates than some other types of debt, such as consumer credit cards. And with an unsecured loan, there's no collateral required so you aren't putting your assets in jeopardy. Approval is typically quick and upfront costs are minimal in most cases, with many of the best personal loans charging no origination fee.
You'll usually have a choice of loan terms, and some lenders allow you to borrow up to $50,000 or even up to $100,000 (depending on income and credit) so you have the potential to borrow enough to fund a solar panel system.
The big upsides to personal loans are the lower interest rates, low fees, quick application process, repayment term flexibility, and a vast number of lenders, which makes it easy to shop around for the best offers.
The downside is you'll have to find and apply for solar financing yourself and the rate you pay might be above what you'd be charged for a loan that borrows against the equity in your home.
3. Home equity loan
A home equity loan is a loan for a fixed amount, with your home acting as collateral for the loan. You can shop around to find competitive rates from the best mortgage lenders and will usually be able to borrow at an interest rate well below what a personal loan would offer. Because your loan is being used for home improvements, interest on your loan may also be tax deductible if you itemize, which could make it even more affordable.
The major benefits of home equity loans are the low interest rate and the possibility of deducting the interest paid on the loan. But there are downsides. You qualify only if you have sufficient equity in your home, which means it's worth more than you currently owe on it. There are also closing costs to pay, which could range from 2% to 5% of the total amount.
Finally, borrowing against your home could be risky, both because of the potential for foreclosure if you can't pay the bills and because it becomes more difficult to sell or refinance in the future if your home goes down in value and you end up owing more than it's worth.
4. Home equity line of credit
A home equity line of credit (HELOC) involves borrowing against your property as well, but there are important differences between a HELOC vs. a home equity loan.
While a home equity loan is for a fixed amount, a home equity line of credit allows you to borrow up to a certain maximum set by your lender. In other words, it works like a credit card in that you can borrow a bit, pay it off, and then borrow more if you want. Home equity loans generally also have variable interest rates, while you typically have a choice of a variable or fixed rate home equity loan.
In most cases, the interest rate on your home equity line of credit will be below the rate you'd pay for a personal loan. Also, the interest on your line of credit may be tax-deductible because you're using the money for home improvement. These are the upsides. The downside is that a variable rate can change, which then changes your monthly payments. There are also closing costs to pay, and you are again putting your home at risk by using it as collateral.
5. Lease or power purchase agreement
Engaging in a power purchase agreement means you don't actually buy your solar power system. Instead, the PPA company installs a solar system on your roof and sells you the electricity it produces. You find out your rate upfront, and it could be a fixed monthly payment or based on the amount of electricity you use. With solar PPAs, you enter into a contract with the company, which usually lasts between 20 and 25 years.
A solar lease agreement, on the other hand, means you pay a fixed monthly fee to lease a solar electric system that is installed at your home. The lease term is usually for around 20 to 25 years, which is around the lifespan of a typical solar system. Though you lease the solar panel system instead of own it, you enjoy the same ability to use the electricity produced without paying per kilowatt.
The major benefit to these arrangements is that you get to avoid paying a large upfront fee for solar panels. But there are big downsides. You typically won't get the federal tax credits as you would for installing a system you own. And you won't necessarily save money at the same rate because you'll have your monthly lease payment to make or will have to pay for the electricity from the PPA company. If this is more than what you would pay in monthly loan payments, then you won’t save as much as you would with a solar loan.
When you try to sell your house, a lease or PPA could also pose problems as you might have to buy out your lease or find a new owner willing to take over the monthly payments. This could narrow your buyer pool and make it harder to sell your home, or you might not have the cash flow necessary to buy out your lease.
6. PACE Loan
The Property Assessed Clean Energy (PACE) program is operated through state and local governments that issue bonds to generate money to lend to property owners to fund clean energy products. The money is repaid as an assessment on property taxes and there's a tax lien on the property.
PACE Programs are open to borrowers even with low credit scores who might be unable to qualify for other loans, and interest is generally tax-deductible (subject to limits on state and local property taxes). This is the major benefit of this type of solar panel financing. Since you own the panels, you're also eligible for tax credits that come with ownership. And you won't incur any upfront costs.
But there are a few downsides. PACE loans are only available for residential projects in a limited number of areas, and the interest rate is generally higher than the rate you'd pay on other solar loans. And because the repayment of these loans is an assessment attached to the property, it could present an obstacle to finding a buyer if you have to sell your house. Though, as with a lease or PPA, you might be able to find a new homebuyer willing to take these payments on.
7. Fannie Mae HomeStyle Energy mortgage
Fannie Mae's HomeStyle Energy mortgage allows homebuyers to borrow up to 15% of the as-completed appraised value of their property (that's what the property would be worth once the upgrades are done). These loans can be used for specific costs, including the installation of solar or geothermal systems.
A Fannie Mae HomeStyle Energy mortgage is available when you buy or refinance a home and the money you're borrowing for the energy upgrade becomes part of your primary mortgage. The benefits are that you can borrow at a low interest rate, make just one monthly payment, and pay a single, low down payment.
The downside is that you're borrowing against your home, and you are stretching out the repayment of the solar panels for the entire duration of your mortgage. That could mean you’re paying more in interest costs over time.
8. Cash-out refinance loan
A cash-out refinance loan involves refinancing your current mortgage and taking extra cash out to pay for your solar panels. For example, if you owe $200,000 and your solar panel system costs $20,000, you'd take a cash-out refinance loan for $220,000. This is an option only if you have sufficient equity in your home that you can get approved for this type of financing.
The benefit of a cash-out refinance loan is that you end up with just one monthly payment, and the interest rate on this loan should be lower than many other loan types. Interest is also tax-deductible on any cash-out refinance loan, if you itemize, and if you use the cash for a capital home improvement.
The downside is that refinancing your mortgage could be expensive and time consuming. And you're stretching out paying off the solar panels for the entire period of your refinance loan which could mean higher total interest costs over time.
How to choose the best way to finance solar panels
The smartest approach to financing solar panels is going to vary depending on your needs and personal financial situation. There are a number of factors to consider, including:
- Would you prefer to own or lease your panels? If you want to own your system, you'll need to finance it rather than opting for a lease or power purchase agreement.
- Are you willing to use your home as collateral? If you don't want to borrow against your home, a personal loan would be the smartest approach in most cases.
- Do you want to prioritize reducing total interest costs? If so, a cash-out refinance loan or one of the other options that involve borrowing against your home equity would likely be the smartest money move since the interest charges may be tax deductible.
- How much money do you have to pay upfront? Cash-out refinance loans, home equity loans, and HELOCs might require you to pay up to a couple thousand dollars in closing costs, but they might also have tax-deductible interest.
The important thing to do before you go solar is to take the time to research your financing options, compare offers among different loans and lenders, and make the decision that's best for your needs.
Are solar panels worth it?
The question comes up a lot: "Are solar panels worth it?" Solar panels may be worth it if they generate enough savings on your utility bill to pay for themselves during the life of the system and before you move. You can estimate how much you'll save on your electric bill by determining how much power your system would likely produce. Then divide the cost of your system by that amount to see how long it would take to break even for upfront costs.
For example, if the system would cost $10,000 (including the interest on your loan) and you would save $100 on your monthly electric bill, it would take 100 months — 8 years and 4 months — to pay off the system. If you plan to remain in your home longer than that, the system should pay for itself and solar panel installation would likely be worth it.
Is it better to finance or lease solar panels?
Financing solar panels allows you to take advantage of solar tax credits and incentives available to homeowners. Leasing typically means you cannot take advantage of these tax credits. Leasing can sometimes make it harder to sell your home too, since you would need either to buy out the lease or find a buyer to take over the lease payments. You’ll need to compare the costs of financing versus leasing to decide which approach is right for you.
Is a solar loan tax deductible?
When you borrow to pay for solar panels, your ability to deduct interest depends on the kind of loan you take out. If you borrow against the equity in your home by taking a cash-out refinance loan, a home equity loan, or a home equity line of credit, you should be able to deduct the interest on the loan. But if you get a personal loan or finance the panels through your installer, interest is typically not tax deductible.
If you're interested in installing solar panels, there are many options available to help pay for them. Finding the right financing for solar panels can help you maximize the energy savings that come from making your home greener.