This online guide covers how to finance your residential solar system, a crucial step in determining if solar panels are worth it for your home (we hope so!). Learn the pros and cons of direct ownership and third-party ownership.
How do you pay for going solar?
The best way to finance your solar array depends on your income taxes, credit score, location, and how long you’ll value the system. Speak to an expert for valuable and credible advice about how to finance solar panels. There are pros and cons to every option, and each will have a different implication for how much solar panels will save you and how long it will take for solar panels to pay for themselves.
While solar leases were common in the past and may have worked well for your neighbor, there may be newer, better financing options that are a better fit for you. Nowadays, there’s a range of zero down solar financing options for you to choose from!
Residential solar financing options can be generally divided into two different categories: Direct Ownership (you own it) and Third Party Ownership (they own it). Read on to learn about the options to you within these categories, and the basic pros and cons to be aware of.
From our blog:
Buying Solar Panels: Direct Ownership Options
Going Solar with Cash
Cash is king! If you have enough saved up for this significant upfront purchase, buying solar panels outright with cash payments will provide you with the best savings and return on investment. It’s the best and only kind of interest-free solar power.
Your solar system will be producing free energy and saving you money from the day it’s turned on. The typical payback period for rooftop solar in the United States is 4-8 years, depending on the size of your system and the kind of solar panels and other equipment you selected.
Buying a solar power system with cash is relatively straightforward as there are no third party solar financiers to deal with.
At Solar.com, there are 4 progress payments for a cash purchase:
- “Down Payment/Deposit” – $1,000 is typically due by the time your site visit is completed
- “Due Upon Approval of Site Designs” – $2,000 is due when you approve your ‘final site designs’ from the installer
- “Due Upon Delivery of Materials” – 60% of the remaining balance is due either when the equipment is delivered to you, or on the first day of installation
- “Due Upon Final Building Inspection – the rest of remaining balance is due once your project passes city building inspection.
Taking Out a Solar Loan
If you do not have the cash up front to pay for your system, you can take out a loan with a third party financing company. There are many affordable solar loan providers in the US. Many of these solar financing companies create flexible loan payment plans to accommodate customers who want to put some cash down upfront, want to pay off the loan quickly, have low credit scores, or those who want greater immediate savings. There is usually no down payment on a solar loan, making them attractive and feasible.
However, similar to a home mortgage or any auto loan provider, the lender will add on the cost to finance your system to your loan principal. This cost will depend on various factors such as your credit score or the term of your loan.
Another cost adder of a solar loan to look out for is the interest rate. An APR (annual percentage rate) includes the additional costs added to your monthly payments from the interest rate as well as other fees and payments. The APR of your loan will be fixed and increase your monthly payment, so research your options to find the best APR for financing your solar project!
With the single exception of PACE financing, the process of getting a loan requires a soft credit report check. Typically, a minimum of a 640 credit score is necessary to qualify for a solar loan.
In addition to a good credit score, other required documents for a solar loan include:
- a design of your system to determine the size of your loan,
- a loan application,
- and approval from your loan provider.
With Solar.com, after you receive and choose a bid from a solar installer, you can apply for a loan, finance your project, and begin the installation process.
Types of Solar Panel Loans
Reamortizing a Term Loan
During a term loan, depending on your loan provider, you can re amortize your loan one time for free. Pick My Solar recommends that once you receive your Tax Credit, you apply those savings towards re amortizing your loan. Reamortization will decrease your monthly payments for the rest of your loan term.
Same as Cash Option
For the first 12-18 months, this option will base your monthly payments off of 70% of your loan principal. It will then allow you to pay the remaining 30% with the money you saved from your tax credit in the following grace period, which is typically 12 months. Same as Cash allows the homeowner to get an initial 30% discount on their monthly payments.
A Combo Loan is comprised of two parts:
- The Bridge Loan. Since you are purchasing your solar system with a loan, you will receive the 30% tax credit towards that year’s income taxes. With a combo loan, you will have typically 12-18 months to pay off 30% of your loan principal. You can apply your savings from federal and state tax credits towards paying off the first portion of your loan and receive lower interest rates for the remaining loan term. To effectively pay off the first 30% of your loan within the Bridge Loan term with the tax credits, you must have the tax liability to receive the full credit within the first year. If your income taxes are less than your tax credit, and/ or you do not pay the 30% within the first 12-18 months, you may be stuck paying out of pocket or hefty interest rates for the remainder of the term.
- The Net Solar Term Loan. You will have the remainder of your loan term to pay off 70% of the loan principal.
Keep in mind: Reamortizing a Term Loan will provide higher, upfront, monthly payments, with lower future payments after you receive the tax credit. While the Same as Cash Option will provide lower, monthly payments, followed by a payment with your tax credit savings.
Property Assessed Clean Energy
One of the most prominent of these programs is called Property Assessed Clean Energy (PACE). PACE provides low interest financing to reduce the high, up-front costs that come with switching to solar. Many states sponsor PACE financing to create jobs, promote economic development, and protect the environment. PACE pays for 100% of a project’s costs and is repaid for up to 30 years with an assessment added to the property’s tax bill.
PACE is active in most states and there are many providers in each state.
PACE providers assess if you qualify their program by ensuring you have at least 10% equity in your home, rather than performing a soft credit check. After submitting a PACE financing application, your solar will be funded and installation will be initiated.
From our blog:
- Solar Borrowing 101: Loans Are Not Always What They Seem
- All You Need To Know About Solar Home PACE Financing
Pros and Cons of Owning Your Solar
Pros of Owning Solar
Owning your solar means more lifetime savings for you
Your lifetime savings will differ with your energy usage and zip code, but owning your solar system is typically the best course of action for solar customers. Owning your system, either purchasing it up front or taking out a loan, will result in higher savings than renting from a third party system.
Direct Ownership of solar increases the value of your home
A study conducted by U.S. Department of Energy’s Lawrence Berkeley Labs showed that home-buyers are willing to pay more money, specifically $4/Watt more, for a home with solar. The panels will produce free electricity for years, so the value of your solar will be fixed into the price of your home. Even if you are in the process of paying off a loan for your solar, you can still sell your house. You are able to transfer the loan to the new tenant, or pay off the rest of the loan with the sale of your home.
You are eligible for the Solar Investment Tax Credit
To be eligible for the tax credit, you must:
- Purchase your system with a loan or cash
- Pay income taxes greater than or equal to 30% of your system cost
It’s as simple as that! Here is a step-by-step guide on how to file for your federal Solar Investment Tax Credit. The tax credit is equivalent to 30% of the gross cost of your solar system. The total credit is deducted from your personal income taxes for the year that your system begins production in. But what happens if your income taxes are less than your tax credit? You’re in luck; the Solar Investment Tax Credit will continue to roll over to the next year as necessary for a maximum of 5 years.
Solar Ownership Cons
The only con of owning your system is the responsibility of panel maintenance
Fortunately, maintenance is very easy. There are no moving parts in a solar system, so there is little to no upkeep. Your solar system may need to be hosed off when dirt or dust collects, but for tilted panels, regular rainfall should clean the panels sufficiently. If your panels get damaged and the damage is not covered by the manufacturer, installer, or your home insurance, it will be your responsibility to find accommodations for repair. The installers on Solar.com will provide a robust warranty that should protect you from any unforeseen damages.
If you own your system, you should also be monitoring your energy production by checking your electricity bill or solar production every month. If your system is under-performing, it could go unnoticed for months if not checked regularly.
From our blog:
- Your Complete Guide to the Solar Investment Tax Credit
- How to File the Federal Solar Tax Credit – A Step by Step Guide
Financing Options for Third Party Ownership
A solar lease is similar to a solar loan in the sense that both are forms of residential solar financing with zero down solar financing options. But the similarity pretty much stops there. With a solar lease, you are renting your system from a third party owner. You pay the owner a fixed monthly payment for the full term of the lease, which is typically 15-20 years. Instead of paying your utility company for energy, you would now be paying the solar company for using the panels.
Lease payments may include an escalator, this is a percentage that your monthly payments will increase by year-to-year. Monthly payments are fixed and do not depend on your month-to-month energy production or consumption, so they may be an overstatement, especially when the escalator increases prices down the line.
If you decide to sell your house while leasing a solar system, there are methods to transfer the lease over, but they are difficult and slow.
It is more lucrative to purchase your solar system if you are interested in the long term value of your home plus the system.
At the end of your lease term, you have the option to renew the lease for an additional 5-10 years, remove the system from your home, or purchase the system at fair market value.
Keep in mind: Similar to a Solar Loan, Solar Leases and Solar PPAs will typically require a credit score of at least 640.
What’s PPA solar financing? You can buy the actual electricity produced by the solar system, rather than renting the entire solar system for a fixed price (that may exceed what you actual use). A Purchase Power Agreement (PPA) also constitutes third party ownership, because the PPA provider owns the system on your roof. You will pay the PPA provider a pre-negotiated price per kilowatt hour.
Things to watch out for with Solar PPAs:
- When utility prices fluctuate, your PPA rate isn’t affected. If your local utility’s rate decreases, your PPA rate may be overvalued and your savings will decrease as well. However, when utility prices rise, your PPA rate will give you a better deal for your energy and increase your savings.
- PPA fixed rates may include an escalator, which increases your price per kilowatt hour rate yearly to compensate for these rising utility costs.
Keep in mind: In a Lease, the escalator increases your monthly payments over time, while, in a PPA, the escalator increases your price per kilowatt hour.
The Pros and Cons of Solar Third Party Ownership
Solar Lease Pros
You are not responsible for the maintenance of your solar system.
You have the choice to purchase the system at market price at the end of your third party ownership agreement or after a specified number of years.
Third Party Ownership usually has an term upper limit of 25 years, so if you are looking for a short term switch, third party ownership is not a long-term commitment.
Most options require zero dollars down.
Cons of Solar Leases
Your monthly payments are fixed, meaning you may overpay for your energy if utility rates fluctuate.
You cannot receive the Solar Investment Tax Credit, the owner of the system receives the tax credit. However, if you are retired or don’t earn an income eligible for tax returns, you won’t be able to take full advantage of this tax credit anyway. If you can’t take full advantage of the tax credit, leasing or using a PPA may be the better option!
From our blog:
Every Term You Need To Understand Solar Financing and Solar Prices
- $0 Down – A purchase that requires $0 out-of-pocket cost. This usually pertains to a solar loan.
- Accelerated Depreciation – A depreciation method where your solar system loses value at a faster rate than straight line depreciation. This is related to commercial purposes.
- Annual Savings – The amount of money you save per year by going solar.
- APR – Annual percentage rate; this is the amount you are charged by the lender to borrow money.
- Buy Down or Financing Fee – This is a finance charge that covers the costs and expenses associated with placing the loan. This is typically either a flat fee or a percentage of the of the borrowed total. A buy down is a solar financing technique similar to paying down points on a mortgage that helps you obtain a lower interest rate for the life of the loan. The purchase price will be increased to cover the points reduction on the interest rate.
- Cash-out Refi – This is a refinance of the first mortgage of your home to a new mortgage for a sum greater than what is owed. Since the new mortgage is for a larger sum you keep the cash difference between the first mortgage and the new mortgage. Individuals will often do this to take advantage of a lower interest rate (APR) on the home.
- Debt-to-Income Ratio – How much you owe divided by how much income you have. For example, if you pay $2000 a month for your mortgage and another $1000 a month for the remainder of your debts, your monthly debt payments are $3000. If your gross monthly income is $6000, then your debt-to-income ratio is 50 percent.
- Down Payment – The initial payment made when purchasing a cash system. In California, this will be 10% or $1,000, whichever is less. In a loan purchase, a down payment would reduce the total amount financed, reducing your payments.
- Escalator – In a PPA or Lease, this is the percentage amount that your monthly payments will increase year over year.
- Gross System Price – This is the price of your solar system before any incentives (i.e. federal tax credit) are applied.
- Internal Rate of Return (IRR) – A technique to measure the profitability of an investment. The higher the IRR the better the investment, generally.
- Lease – A third-party owned solar system where the installer will own the solar system and you will make payment for the panels or the energy the panels produce.
- Levelized Cost of Energy (LCOE) – This is the average cost of energy generated by a system over its lifetime. It is calculated by dividing the total amount the system will cost over its lifetime by the total amount of electricity generated. This number is useful for comparing different types of energy (solar, wind, natural gas, etc.).
- Lifetime Savings – The amount of savings your solar system will realize over its lifetime. In most cases, this is projected over 25 years because panels have a 25-year warranty. Realized savings will be even larger as systems will continue to operate past that.
- Loan Provider – The financing institution that is paying the contractor for your solar system in return for monthly payments.
- Net System Price – The final out-of-pocket cost of your solar system after all incentives are applied.
- Ownership – Owning the right to your solar system.
- PACE – Property Assessed Clean Energy Financing is a public-private partnership that helps property owners finance renewable energy projects. Generally, payments are tied to your property taxes allowing flexibility for clients that wouldn’t otherwise be able to go solar.
- Payback Period – The amount of time needed to go cash flow positive after an initial out of pocket investment.
- PPA (Power Purchase Agreement) – This is a third-party owned electricity power agreement where the solar installer will own the system and sell the electricity to the homeowner. Therefore, the homeowners pay the solar installer for the electricity they use rather than the utility. These agreements are generally for 20 years. They may include an escalator.
- Prepaid Lease/PPA – A 100% upfront payment for the value of the electricity generated for 20 years.
- Price Per kWh – The price paid per unit of electricity used in a home (kilowatt hour).
- Price Per Watt (PPW) – This is the most common way to compare the cost of a solar system. For example if your 6kW system cost $20,000 the price per watt is $20,000 / 5,000W = $4/Watt.
- Re-amortization – The modification of a loan. This will often change the monthly payment.
- Refinance (Refi) – Refinancing a loan to achieve a lower interest rate and terms that are more equitable to you.
- Return on Investment (ROI) – The rate of return on an investment relative to its cost. The higher the rate, the better the investment.
- Secured Loan – A loan where the borrower pledges some asset (i.e. home, solar system) as collateral for the loan.
- Solar Financing – Financing provided to a client that needs financing specifically to move forward with solar energy.
- Solar Loans – Loans specifically for solar.
- System Cost – The cost of the solar system (see gross system cost).
- System Payback – Another term for payback period.
- Term (Lease or Loan) – The contractually agreed upon length of the solar loan (ranges from 12 to 20 years) or lease (usually 20 years).
- Third Party Owned (TPO) – A solar system owned by a third party, typically the installer.
- Unsecured Loan – A loan that has no collateral backing it. It is issued and supported by the borrower’s creditworthiness.