Solar Loans: Everything You Need to know
The solar loan is an integral part of the rapidly growing solar industry – but there are a couple of things you should consider before signing a deal.
Solar panels are cheaper than ever before. Between emerging technologies and tax credits galore, you can put solar panels on the roof of your home for far less than what it used to cost even a decade ago.
Previously, you needed to either purchase the panels outright with cash, or get a solar lease. The lease would allow you to “rent” the panels, and send unused solar energy back to the utility company. Then, you would receive a credit from them, resulting in significant energy savings. Of course, you can still lease solar panels, but now there’s a third option: the solar loan.
Where Do You Get a Solar Loan?
There are many options for residential solar loans, in part thanks to local community providers like credit unions and regional and national banks that are familiar with solar photovoltaic technology.
Additionally, solar panel manufacturers offer loans through their installation networks. And national lending institutions now offer specialty loans tailored to solar panel systems.
Those who have solar loans insured by the Federal Housing Administration can provide even better loan terms! In fact, plenty of city and state agencies have partnered with private lending institutions, using public money to offer lower interest rates for energy efficient home improvement projects.
Even if none of those options worked there are still • Peer-to-Peer lending services like Prosper.com, which can offer low rates for personal loans. • Mortgage refinancing: This isn't a loan exactly, but if you're eligible for a mortgage refinance (and rates happen to be extremely low right now) you may be able to pay for going solar by refinancing your home first.
How Are Solar Loans Different?
Although solar loans are similar to other home loans, like borrowing money to add a room to your house, the important thing to remember is that a solar loan lets you own an asset that generates huge savings. You’re not simply installing solar panels to help reduce the overall cost of electricity and use greener energy to power your home. In addition to the long-term benefits you are able to apply the 30 percent federal tax credit to your taxes, along with your state’s and county’s rebates and incentives. Between the incentives and the long-term cost-saving benefits, and increased home value – solar goes way beyond what you’d get with a loan to remodel your bathroom.
Which Solar Loan Do I Choose?
As always, you should explore multiple financing options and solar installation proposals. Term lengths, credit requirements, collateral and more all play a factor. One bank’s loan rates may differ wildly from a solar manufacturer’s. Take the time to understand how much you’re asking to borrow, and ask for help in choosing the right loan so you get the most financial assistance possible.
Moreover, you should know the difference between secured and unsecured loans. Secured loans need an asset to serve as collateral, like your home. Think of home equity loans to serve as an example. Or, look into Title 1 loans, which have more specific loans aimed directly at green home improvements. Unsecured loans don’t need collateral, apart from maybe the solar system itself. Under these, however, you need to keep in mind whether you’re financially able to refinance your mortgage.
Since many solar loans do not need money down, the longer-term contracts will have higher monthly rates with smaller payments per month. To get the most out of your loan, it’s better to go with higher monthly payments that charge less interest over the total life of the loan.
You should definitely start your inquiries with your bank. Here are a few points you should keep in mind before asking for any specifics:
• Many loans are $0-down and allow you to finance the total amount of your solar panel system. • Different types of institutions offer solar loans solar loans: from traditional banks to solar panel manufacturers. • Solar loans have the same basic structure, terms and conditions as other home improvement loans. • Solar loans offer immediate returns by saving you money on your electricity bills right away, even as you repay the loan.
Unlike 8 years ago, getting a bank to finance your solar is pretty straightforward now. There are two main things you should keep in mind before applying for a solar loan:
Your credit rating should be sufficient to get a second mortgage FICO score of above 620)
You should have 10% to 20% equity in your home based on its current value
If you have all the above, a solar loan is as easy as a second mortgage or home equity loan.
Take a PACE loan, HELOC, or other loan
A solar energy system adds value to your home. Quite a bit, in fact. There have been studies in California and Colorado that show what’s called a “home price premium” of $1,000 to $5,900 per kilowatt (kW) for solar installations. Even before those studies, a 1999 article in The Appraisal Journal stated that home value increases $20 for every $1 reduction in annual utility bills.
Considering the price premium for solar energy systems, many lenders now offer loans that take the added value into consideration, and finance the loans based on expected life of the system.
Property-Assessed Clean Energy (PACE) loans are one kind of loan that is funded based on municipal bonds, and offered to homeowners with terms of 15 or 20 years.
Many states offer PACE financing programs. The terms of the loan can be very favorable, including payments that are below the energy savings the system provides and the ability to deduct interest payments from a homeowner’s taxes.
Taking a home equity line of credit (HELOC) is another way to finance a solar energy system. Some installers even have preferred lenders they work with to provide home equity-based financing to homeowners. The loan or line of credit works much the same way a PACE loan does, but might come without some of the same benefits. If your municipality doesn’t offer PACE financing, a HELOC might be a way to get low-down payment solar.
First things first: Ask your bank about loan options
Banks are becoming aware of a big advantage that makes solar a good bet. Unlike borrowing for a typical home improvement, borrowing to go solar has an immediate financial return.
Most banks now allow you to finance solar like they would finance any other home improvement loan like a new deck or bathroom, with a second mortgage. With interest rates at all-time lows of under 2%, the economics of a solar purchase are on your side.
A new deck or bathroom doesn’t actively reduce your overhead costs the way a solar array does.
Depending on how you structure your solar loan, the immediate savings on your electricity bill mean you come out ahead right away.
That is because the additional payments on your mortgage to repay the loan, when combined with a much smaller post-solar electric bill, can easily amount to less than the old utility bill that you’ve paid monthly for years to merely “rent” your electricity from your electric utility.
So borrowing to save money immediately with solar is a means to owning a “cash cow.” A solar loan is not like another debt that simply adds to your indebtedness.
There are many options for structuring this kind of financing, and you just need to decide how you want to set up the loan. By starting with the amount you want to pay each month between your new lower bill for electricity from the utility, plus the solar loan amount, you can determine the length of the loan.
If you elect a monthly payment that is lower than what you were paying for your electric bill before solar, your savings on “overhead” begin immediately.
Ask Your Installer about solar loans!
Solar companies themselves are beginning to offer in-house finance. This is similar to the way that when Americans first started buying automobiles in the 1940s. Many auto companies began offering in-house financing, because it just wasn’t that easy to pay for the new automobiles outright.
General Motors now simply known as GM, was one of the first. Now GM Financial, the financing arm of GM is a separate company in its own right.
Bear in mind though, that the interest rate you get from your mortgage bank might actually be lower than what your solar company can do. So once you understand that it really is a buyers market now for solar loans; go out and talk to the bank that holds your mortgage, any bank that wants to be your new bank, as well as your local credit union.
Solar loans when you have no equity in your home.
There are banks that are actively seeking solar borrowers now:
These banks provide solar loans even if you have no equity in your home for a second mortgage (ie unsecured solar loans).
These solar financing firms allow any installers to offer financing nationwide:
Other solar loan options:
- Solar panel manufacturers offer loans, often through their solar installer networks.
- Credit unions all over the country are developing solar energy loan products for homeowners, and often offer lower-cost solar loans.
- National lending institutions offer specialty loan products tailored to residential solar panel systems.
- Public-private partnerships can offer solar energy loan programs. Local government agencies partner with private lenders to offer solar loans with lower interest rates and no fees.
- Utilities offer on-bill financing programs that allow homeowners to finance solar energy systems and repay the borrowed amount through electric bills.
- Municipalities sometimes offer PACE (Property Assessed Clean Energy) solar energy loans, which are repaid by an annual assessment on property owners’ property tax bill.
So shop around.
You might be surprised at the savings. Not only all the tens of thousands you do save over the long term 30-40 year life of your solar system, but from day one. (And don’t forget, the 30% Investment Tax Credit is going to reduce your upfront payment.)
A loan can give people interested in solar a way to put next-to-nothing down, and financing options can include payments lower than the electricity savings, creating positive cash flow. The system is still yours and you get all the tax benefits and incentives, but you are also responsible for lifetime maintenance and performance.