For many years the solar market was growing quickly for commercial properties, but the cost was out of reach for many residential customers. Now that trend is changing, with more than 600,000 homes boasting solar power by the end of 2014. By 2017, the residential sector will be the largest market for solar in the United States, according to the Solar Energy Industries Association.
Much of that change is thanks to the broadening solar loan options for homeowners. As the solar market continues to grow and prove itself across the country, more lending organizations are moving into the space to offer loan packages for residential solar arrays. The National Renewable Energy Laboratory points out the significant benefits homeowners can reap from this change:
Understanding the various lenders and solar loan products is a must for those who are interested in pursuing a loan for financing. Here is what homeowners need to know before signing on the dotted line.
10 Tips for Solar Loan Shoppers
There was a time when leases or PPAs were the only options for homeowners who didn’t have the cash to buy a solar array outright. But as solar power has become more popular, many banks are offering the opportunity for homeowners to obtain a loan instead. There are several reasons why loans are a good idea, and many things to consider when seeking to get approved.
When the homeowner owns the solar system, they can take full advantage of all rebates and incentives, as well as all the savings. Though maintenance becomes the homeowner’s responsibility, many contract the work to a solar company to ensure continuation of top-notch energy savings. The system is insured by the homeowner as well, but is usually rolled right into the typical homeowner policy with a special solar rider.
Until 2009, there was a cap of $2,000 on the homeowner’s investment tax credit; now there is no cap, which means that homeowners can reap the entire 30 percent credit (depending upon their unique tax situation, of course). States might offer rebates and incentives on top of federal money, making a solar loan much more advantageous than it was just a few years ago.
Depending upon the timing of the loan, claiming that 30 percent could be tricky. “[Some] companies will offer great same-as-cash offers for 30 percent of the loan for 18 months or so. They do this to match your federal tax credit,” said Justin Allender, portfolio manager for First GREEN Bank. “However, many families cannot realize the full tax benefit in one year since it is not refundable. For example, I had to split the tax credit for my solar system over two years. This could have hurt me if I had taken out a same as cash offer, and not been able to pay it off before the accrued interest kicked in.”
Some lease or PPA agreements begin with a low interest rate or monthly payment, and then increase over the life of the contract. PPA rates might also increase with inflation. With loan payments, homeowners have the option of a set payment made over a set period of years, with the rate locked in.
A loan for solar power is likely to result in payments that are lower than the current electric bill. This means that homeowners see less money going out of their pocket from the very start. In addition, when compared to PPAs or leases, the levelized cost of energy (LCOE) for solar loans was 19 to 29 percent lower, depending upon the term of the loan, according to a National Renewable Energy Laboratory report.
Though loans do prevent the homeowner from taking the full financial hit of purchasing a system outright, there are often loan fees that are due at closing. Depending upon the loan agreement, these fees could total up to a few thousand dollars.
When a homeowner opts for a solar system through leasing or a PPA, selling the home can be tricky. The buyer will have to agree to take over the contract, but they might not qualify. In that case, the current owner will have to buy out the remainder of the lease or PPA agreement, which could be several thousand dollars – a nasty surprise that could easily negate a chunk of profits from the sale. With a loan, the solar system can be sold along with the house, with no additional hassles.
Rather than deal with the complications of a PPA or lease, the homeowner knows what they are getting – a system that they will make payments on for a set period of time. After the payments are done, they own it free and clear.
If the solar system is obtained through a traditional home equity loan, the interest on the loan might be tax deductible – a nice bonus for those who want to see some tax benefits over the years of loan payments.
“What’s most important is to look out for how the loan is structured,” Allender said. “Some companies will offer a great rate, but make the loan very short term (such as 3 percent for seven years). This can make it very challenging for an average family to budget for a solar panel system.”
Who Offers Solar Loans?
Traditional banks are the first place most homeowners think of when it comes to getting a loan. But while a traditional bank is definitely an option, when it comes to solar loans, there are many other possibilities out there. The following institutions are potential options for homeowners as they shop around for the best interest rates and terms.
Municipalities might offer a PACE (Property Assessed Clean Energy) solar loan. In this type of loan, the local government finances the cost of the solar system up-front, then attaches a lien to the property, according to the Department of Energy report “Homeowners Guide to Financing a Grid-Connected Solar Electric System.” This lien is paid over time through special assessments on their property tax bill. A home energy audit might be required to qualify, and maintenance is the homeowner’s responsibility. There might also be implications for an existing mortgage; check with the mortgage lender and the municipality for details.
Public-private partnerships are designed by government agencies and private lenders in the hopes of enabling more homeowners to take advantage of loans with lower interest rates and little to no fees. These partnerships have already been proven to work in various state and local government initiatives; now they are being extended to homeowners.
Solar companies are currently the most common place where homeowner can obtain loans for the equipment. However, keep in mind that companies that do it all – including the selling, installing, and financing – might not have the most competitive loan terms, with rates ranging up to 8 percent, according to NREL.
Utilities offer financing programs that allow homeowners to obtain a loan to purchase solar systems, and then pay that loan back through payments on their monthly electric bills. These loans are typically for less than 15 years and have an interest rate of 3 percent or more; however, not all areas participate in the utility amortization program, according to NREL.
National lending institutions are jumping into the solar loan game by offering products that are specifically tailored for homeowners who want to put solar panels on their roof. Just as with traditional banks, the requirements vary depending upon credit, the size of the array, and other factors.
Credit unions recognize that many homeowners view solar power as a home improvement project, one that will pay off in the long run when they choose to sell their home, and so are treating it as such. Credits unions often have better loan terms than solar panel manufacturers, and those who are long-term customers might see even better savings.
5 Things to Know Before Signing a Loan
As with any major financial commitment, it pays to know exactly what you’re getting into. Before choosing a solar loan, homeowners should know all the details inside and out. This helps prevent any nasty little surprises during the loan process, and helps inspire strong confidence in the financial choices surrounding solar power. Here are some of the aspects that every homeowner should know:
Security for the solar loan depends upon the entity that offers it. For example, a Title 1 or HUD loan is a government-backed loan that is secured by a second mortgage on the home, just as with a home equity loan. However, a loan through PACE is secured with a tax lien, while a loan through a solar company is secured by the solar system itself.
The credit score might determine not only loan approval, but the interest rate as well. For example, a FICO score between 580 and 650 meets the FHA minimum, but can result in interest rates of up to 10 percent. A good example of how credit score affects interest rates comes from Admirals Bank, where a FICO between 650 and 659 qualifies for a 9.95 percent interest rate, while a FICO between 795 and 850 qualifies for a 5.95 percent rate on a 20-year loan.
The market interest rate on solar loans is between 2 and 8 percent, according to a 2015 report from the National Renewable Energy Laboratory. That’s a nice advantage over the 9 to 10 percent interest rate on typical third party financing.
In some cases, yes. For instance, those who are seeking a PACE loan have to undergo an energy audit to ensure that installing solar panels is the right move. Many private banks and lending institutions might have their own rules concerning not only proving that a solar array is needed, but also proving that the solar array is actually installed and up and running within a certain period after the loan is awarded.
“Solar panels are considered a permanent fixture to the home, so there would be a lien placed on the property if the loan were to default,” Allender said. “The key is to buy the right-sized system for your home. Doing so will help increase the likelihood that you’ll be able to simply replace your power bill with your solar bill each month.”
Selling Your Home with a Solar Loan
What happens if you choose to sell your home a few years down the road?
Those who have a lease or PPA might be in quite the bind, depending upon the contract. If the new buyers want to keep the lease or PPA, they might have to go through the qualification process. If they don’t qualify, they might back out of the sale – or the homeowner might have to buy out the remainder of the lease or PPA agreement, which could add up to thousands of dollars they didn’t expect, and cut down significantly on profits from their home sale.
With a solar loan, however, there are fewer variables to worry about. In fact, most solar loans are designed much like home equity loans: When the home is sold, all the improvements to the home are sold as well, and that includes the solar array and all equipment.
PACE financing offers a similar option, as the cost of the solar array is incorporated into the taxes paid by the homeowner each year. In most cases, the new homeowner can simply take over the payments, just as they would take over the property taxes, until the loan is repaid.
The Future of Solar Loans
Solar is consistently proving to be an excellent investment. A 2015 report from the NC Clean Energy Technology Center found that in all but four of the 50 largest cities in the United States, the return on investment when installing a 5 kW solar power system makes more financial sense than investing in the stock market. The up-front cost is getting much cheaper too; according to the Lawrence Berkeley National Laboratory, residential solar cost $12 per watt in 1998; by 2013 the cost had dropped to about $4.70 per watt. There is no reason to believe that trend will not continue.
With the extension of the 30 percent tax credit and the significant drops in the cost of solar panels – the cost of solar panels has dropped by 80 percent since 2008, according to the International Renewable Energy Agency, and prices will continue to drop – more homeowners will look to solar loans as a way to take advantage of all the possible credits and discounts, as well as jump on the solar bandwagon while costs are on the way down. Understanding solar loans and all the benefits is the first step for homeowners who are eager to harness the power of the sun to lower their utility bills.