Obtaining solar panels for your home can be a great investment. It can help you to save thousands of dollars in energy costs over the years you own your home.
But the initial investment for financing solar energy systems in a home is high; it can run $10,000, $20,000 or more. Many Americans are unable to pay for the system in cash up front, which may discourage them from spending the money at all.
We reached out to Bryan Dornan of Refiguide.org, who specializes in helping homeowners obtain specialized loan programs. Dornan says, “Millions of homeowners have benefitted from tax credits and deductions from solar energy programs endorsed by local, state and the federal government.”
For more information on navigating the confusing mortgage maze, as well as reading the latest money management tips, visit the Own Up Blog by clicking here.
To help you to finance solar energy for your home, save money on electric bills and help the environment, there are two general categories to choose from.
First, you can get a loan, where you eventually own the system outright. Or, you can lease the system. If you would rather not spend all that money up front to pay for a solar system, a solar loan can be a good option because you will be able to finance the entire cost.
Also, with the loan, you will own the system and are entitled to various rebates, tax credits and various incentives. These many benefits allow you to maximize your return on your solar system investment.
Two Types of Solar Loans
There are both secured and unsecured solar loans. With both options, there are zero money down options, so you do not have to pay anything up front. Regardless of the loan you select, your loan payments each month are often less than your electric bill today so you will start saving immediately. If electricity prices keep rising, you will be saving even more money.
Home Equity Loan
The most common type of secured loan to finance your solar system is a home equity loan or home equity line of credit (HELOC). With this loan, you will borrow some of the equity in the property. The home is the collateral on the loan. If you do not pay the loan, the bank could foreclose on the house, so you need to really make sure you can afford the additional monthly mortgage payment.
One of the biggest advantages of getting a home equity loan to finance solar energy is that the interest rate is very favorable – typically around 5% this year. Also, the interest on the home equity loan is tax deductible.
FHA, Title 1 Loan
FHA, Title 1 loans are a similar secured loan that is guaranteed by the US government. Your home will also serve as collateral. Just like a home equity loan, the terms are very favorable with interest rates from 5% to 7%. If you default on the loan, the lender has a lien on the house, so the loan will be paid off when you sell the home.
These solar loans do not have any collateral behind them, which makes them a higher risk for the lender. This means you will pay a higher interest rate. Unsecured loans are just like other personal loans. Interest on these loans cannot be tax deducted, and if you default on the loan, your credit score will take a hit.
Solar Leases and PPAs
Solar leases and power purchase agreements help you to take advantage of the financial and environmental benefits of going solar without actually owning the system. Both of these options are similar to renting. It also is somewhat like a car lease.
With the solar lease, you will pay a fee each month for the system and get to use all of the electricity those panels produce for free. With a PPA, you will agree to buy the electricity the system produces at a cost lower than what you pay your utility company.
Most leases and PPAs offer 100% financing options so you do not have to pay any money up front. Your payments each month for your lease or PPA are often less than your electric bill at present. You will start saving money immediately. A solar lease or PPA can help you to save 10% or even up to 50% on your utility bill without making any investment up front.
Solar panel systems do not require any maintenance. But if something were to go wrong with the system, the PPA or lease company is responsible for repairs as it is the owner of the system.
Getting a lease for solar energy takes less effort and time than getting a loan. In most cases, you will sign a 20 year contract with your leasing company. They will install the solar panels on the home. Most people need to have a 700 credit score or higher to get a solar lease or PPA.
What Is Your Best Option?
When you lease a solar system, the leasing company owns the system. So, most of the financial benefits, including rebates, tax credits and other incentives go back to that company. If you want to get as much benefit as possible from solar from your home, getting finance solar energy is the better option.
That said, leases and PPAs are good choices if you want a simple solution and to enjoy many of the financial benefits of going solar. Leases and PPAs also are a good choice if your taxes are lower than the tax credit you would get.
In summary, once you understand all of your options for going solar at home, you need to crunch the numbers and determine the best solution for your goals, needs and finances.