How Can I Finance a Solar Energy System?
Sarah Lozanova - February 11, 2019
Are you considered installing a solar power system on your home? Do you have concerns about the affordability of a home solar energy system? This article is the second of a three-part series that explores the financial aspects of installing home solar.
In many cases, financing a solar system is a good idea financially, especially if you don’t have thousands stashed away to invest. Depending on the installation costs, the energy production, and the cost of grid electricity, many solar power systems are cash-flow positive from day one. This means that the savings from the solar system are greater than the loan payments. This is the ideal situation because it means you are saving money, increasing your property value with the solar system, and using clean energy. It’s a win-win all around.
However, if the term of the loan is short or you have very low electricity rates, you might pay more in monthly loan payments than your utility bill savings. But keep in mind that manufacturers design solar systems to last more than 25 years. So, you will continue to save money after you’ve paid off the loan.
When looking for solar financing, the same general rules apply as with any other type of loan.
- A low-interest rate means you will pay less in interest over the life of the loan.
- A shorter term means the monthly payments will be higher. But typically, a short-term loan will cost less over the life of the loan.
- Loans are either secured or unsecured. Secured loans use an asset you own as collateral.
- Consider all the fees associated with the loan, such as origination fees, and not just the interest rate.
Home Equity Loans
A home equity loan allows you to use the equity you have in your home as collateral for the loan. It typically has a fixed interest rate for a set term, and you receive the money in a lump sum. This arrangement functions similarly to having another mortgage on the home, but you may need to have your home appraised. Because the home is collateral for this loan, it is essential that you are able to make the payments.
The interest rate on home equity loans is typically pretty low. The payments are also fixed, so it is easier to budget. According to the IRS, the interest on a home equity loan is tax deductible if it is used “to buy, build, or substantially improve the taxpayer’s home that secures the loan.”
Solar Loans Through the Solar Installer
Many solar panel installers offer financing through a third party. These financing programs vary by the installer, but often offer both a fixed-rate and term loan. The home is not commonly used as collateral and the credit requirements vary by the program.
Property assessed clean energy (PACE) financing is available in many areas of the United States, and solar energy installations often qualify. This loan enables home and business owners to pay for the upfront cost of a solar system and pay the loan back over time through a voluntary assessment. The loan is associated with the property and not the individual. The loan period is commonly between 10 and 20 years.
Just like shopping around for a solar installer, it’s a good idea to shop around for a solar loan to find the best rates and terms. Finding the best solar loan can make all the difference in being able to afford a solar energy system and save money over time.