Cash Smarter

February 6, 2017  by: Aaron Crowe

Financing Solar Panels for Your Home

Financing Solar Panels for Your Home

The sun’s energy is free, but harnessing it isn’t.

Figuring out how to finance solar panels can be tricky, with more options for putting solar panels on your roof than there are loan options for buying a home.

Solar panels and the equipment that goes with them to convert the sun’s energy into electricity is expensive. Based on the average house paying $75 per month for electricity, a solar system that generates that much power costs around $25,000 to $35,000, according to the Solar Power Authority.

Utility company incentives, tax breaks and other subsidies can cut the cost in half, but even then it can take years for the solar panels to pay for themselves in energy savings.

A system that costs $18,000 — which includes installation, labor and the solar power system — has a payback period of about 20 years, the Solar Power Authority estimates.

Cost considerations for solar panels

How many solar panels your home will need and if solar power is worth installing depends on a number of factors. These include the size of the roof, amount of sunlight your home gets, energy needs and how much electricity you’ll still need to buy from your utility company.

Since the sun doesn’t shine on your home 24 hours a day, it won’t generate power all the time. Unless you live in a sunny state such as Arizona or don’t use much electricity and your solar panels produce more electricity than you’ll use, you’ll need to buy electricity from the power company when it’s dark or your solar system isn’t providing enough electricity.

The good news is there are many ways to finance solar panels and eventually power your home for free with power from the sun.

Tax breaks and other incentives

Before deciding how you’re going to finance solar panels on your home, look into incentives that can drop the costs.

Tax credits, rebates and other ways to save on renewable energy can be searched by state at the U.S. Department of Energy website. County and state governments have programs to make solar power affordable, as do local utility companies.

In 2016 the federal solar tax credit, also known as the investment tax credit (ITC) was extended for five years. It allows 30 percent of the cost of installing a solar energy system to be deducted from federal taxes. There is no cap on its value.

The federal solar tax credit is for people who own their solar system. Even without enough tax liability to claim the entire credit in one year, the remaining credits can be rolled over to future years that the tax credit is in effect.

Homeowners who lease their solar panels or have a purchase power agreement, which is similar to a lease, don’t own the system and aren’t eligible for the tax credit.

Pay cash

If you have the $10,000 to $20,000 in cash needed upfront to pay for a solar system, you’ll avoid financing costs. Rebates, incentives and tax credits will reimburse a large portion of the initial costs, says James Straatman of Legend Solar, a solar provider in the west.

The downside is that warranties last 25 to 30 years, and you’ll be responsible for the maintenance of your system, Straatman says.

Solar lease or power purchase agreement

A solar provider owns the solar power system that is leased to the homeowner. For people who don’t want to take out a loan or otherwise pay upfront for a solar system, leasing can be an easy way to get solar power.

“As there is no requirement to have equity in your home, this can represent a decent option for anyone looking for the easiest way to finance their panels,” says Jeremy Colonna, principal at Matchpoint Funding in Los Angeles.

A solar provider installs the system and is responsible for maintenance, monitoring and repairs. The company also gets the tax credit. Many leases have the option to buy the solar panels after the contract is up, which can be as long as 20 years.

The customer pays the company each month for the amount of solar power their system generated, usually at a lower rate than what their electric company is charging them.

“With a solar lease, the solar provider owns your solar power system and you lease its use by paying a predetermined monthly amount regardless of how much electricity the solar panels produce,” Straatman says.

Another type of solar lease, called a power purchase agreement, or PPA, requires customers to pay a set amount for every killowatt hour the solar system produces.

Also called third-party ownership, solar leases and PPAs are on the decline after peaking at 72 percent of all systems installed in 2014, according to a residential solar financing report by GTM Research.

It forecasts that 55 percent of solar systems installed this year will be paid for in cash or with a loan. In 2021, ownership is projected to increase to 73 percent of solar systems installed.

Home equity loan

solar panelsA home equity loan or home equity line of credit uses a house as collateral. Interest rates are generally low and the loans can make sense if the homeowner will save more on their electricity bills compared to their loan payments. Mortgage interest can usually be deducted from federal taxes.

A good credit rating may be needed to qualify for a home equity loan, and the equity in the home will be reduced. There’s also a big risk involved:

“Your home will have a lien against it so you are at risk of losing it if you are unable to make required loan payments,” Straatman says.

Home loans for solar panels

There are many home loan programs for solar power systems. Here are some that are listed in a federal overview of how to finance solar energy systems by the U.S. Department of Energy:

Provider

Loan Amount

Term

Collateral

Fannie Mae

$15,000

10 years

Unsecured

Freddie Mac

$240,000

15, 20, 30 years

95% loan-to-value of first mortgage

USDA

$300,000

10 years

Negotiated

HUD

HUD area limits

15 and 30 years

To 120% LTV

Veterans Affairs

$203,000

15 and 30 years

100% LTV

EPA

No limit

Not listed

120% LTV

Property Assessed Clean Energy Program (PACE)

Some states offer a PACE program, which allows municipalities such as a city, county or state to loan money for solar energy that is repaid by the homeowner through an additional assessment on their property taxes for 15 to 20 years.

The programs don’t reduce equity in a home. If the home is sold, the tax liability is transferred to the new owner.

Like a home equity loan, electricity savings often exceeds loan payments immediately. No money down is required by the homeowner.

PACE financing is enabled in 32 states and the District of Columbia, according to Modernize, a service that connects homeowners with solar contractors. But that doesn’t mean they’re all active. A state legislature may have approved PACE, but your local government may not offer it or some states have put the programs on hold. A free database lets homeowners search for a local PACE program.

One downside is that because monthly payments are based on your home’s property assessment, predicting the exact payment amounts can be difficult to budget for.

Peer-to-peer lending

Borrowers and lenders are matched through crowdsourcing platforms such as Lending Club and Prosper for loans that can be used to finance solar panels.

Your home typically isn’t used as collateral. That can lead to higher interest rates with peer-to-peer loans than you’d pay with home equity loans, for example.

Shop around

There are many ways to finance solar panels, so be sure to shop around and find the best financing method that works for you.

Solar power for your home may not be feasible if your home doesn’t get much sunshine each day or if your roof is so small that it can’t fit enough solar panels to generate anywhere near the amount of power you need.

On the other hand, solar power could be an investment that saves you money for years to come. To get started, search online for a solar power calculator that will help you determine how much electricity a solar system could generate. If the numbers add up, you could be on your way to eventually getting most, if not all, of your electricity for free.

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