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Exploring Solar Financing: Rates, Loan Terms, and More

Although solar energy is often associated with a significant initial investment, many homeowners opt for solar loans to finance their installations. Over half of solar system owners take advantage of these loans, many of which offer no down payment. Interestingly, even homeowners who could pay in full upfront often prefer solar loans to benefit from instant energy cost savings while retaining cash for other uses.

Solar Financing Explained: Combo and Reamortization Loans

Solar loans differ from traditional loans such as home mortgages or car loans because they are structured to accommodate the 30% federal solar tax credit. This accommodation is achieved by delaying the down payment until after the tax credit is received. There are two main types of zero-down solar loans created with the tax credit in mind: combo loans and reamortization loans (also known as "re-ams").

Integrated Solar Financing Solutions

Solar combo loans offer borrowers the benefit of combining two types of loans to finance a solar energy system while taking advantage of solar tax credits. These loans are a suitable option for those who anticipate a sufficient tax liability in one year to claim the full solar tax credit based on their income. Consulting a licensed tax professional is advisable to assess one's tax liability accurately.

The combo loan structure includes:

Primary Loan: This loan covers the net cost of the solar system after the tax credit. For instance, if you are purchasing a $20,000 solar system, the primary loan would be for $14,000.
Bridge Loan: This loan covers the expected value of the solar tax credit, providing immediate funds for the borrower. In this scenario, the bridge loan would be for $6,000.

Borrowers typically have 12 to 18 months to claim the solar tax credit and use it to repay the bridge loan. Alternatively, other funds may be used to repay the bridge loan. If the bridge loan is not repaid within the allotted time frame, the balance is added to the primary loan, which can increase monthly payments.

For instance, with a 20-year combo loan at a 4.5% interest rate on a $20,000 solar system, the loan terms and structure would be similar to the above example. Adjusting the loan terms, interest rates, and repayment plans can offer more clarity on the total cost and potential savings of the solar investment.

The benefit of a combo loan is that your initial payments are calculated based on the net cost of the system, which is $14,000 rather than $20,000. Yet, if you do not pay off the bridge loan within the agreed-upon timeframe, the remaining loan balance will increase, resulting in higher principal and interest payments.

Adjusting Solar Loan Payments

Reamortization solar loans are a financing option used by approximately 60% of solar borrowers, specifically tailored for homeowners, including retirees, who may not have enough income to fully claim the 30% solar tax credit in a single year.

What exactly does reamortization entail? It involves making a lump sum payment towards the principal of the loan, which then reduces the monthly payments for the remaining term of the loan.

In a reamortization solar loan, borrowers can benefit from a one-time free reamortization option, allowing them to adjust their loan payments to accommodate the solar tax credit. This lump sum payment can be made from any source and at any time. In contrast, other types of loans often incur servicing fees for reamortization.

Here is an alternative paragraph outlining the benefits of reamortization loans:

Reamortization loans offer several benefits for borrowers. Firstly, you have the flexibility to decide when to make a lump sum payment, as there is no fixed deadline. This allows you to reamortize with a larger lump sum payment than the value of the tax credit if you choose, which can further decrease your monthly payments. Alternatively, you may decide not to make a lump sum payment at all, keeping cash on hand for other purposes. Ultimately, the best type of solar loan depends on your individual preferences and your ability to fully claim the solar tax credit within a year.

Exploring Solar Loan Options: Terms, Interest Rates, and Monthly Payments

When considering solar loans, borrowers appreciate the flexibility they offer. Down payments can range from 0% to 100%, and loan terms vary from 5 to 25 years, although terms between 8 and 20 years are more common.

Many solar loan borrowers prefer either 12-year or 20-year terms, with a slight preference for 12-year terms.

Generally speaking:

Shorter loan terms lead to higher monthly payments but less total interest paid.
Longer loan terms result in lower monthly payments but more total interest paid.

The table below demonstrates how these variables can impact costs, using a $20,000 solar system as an example.

Here's an alternative paragraph to convey the information in a clear and engaging manner:

"The interest rates mentioned above are just examples and not current rates or an offer to lend. However, when you create a solar loan, you are effectively securing your own stable electricity rate for the next 25 years. Consider a 5.7 kW solar system that costs $20,000 ($14,000 after the tax credit) and generates 208,000 kWh of electricity over its 25-year lifespan.

With a 12-year combo loan, you would spend $18,645 on the system, resulting in a levelized cost of 8.9 cents per kWh. Alternatively, a 20-year combo loan would cost $30,230, making the levelized cost 14.5 cents per kWh. In comparison, the national average price for grid electricity was 16.8 cents per kWh in October 2023, with prices nearing 25 cents per kWh in states like California and New York.

By going solar, you gain control over your electricity rates, an advantage you wouldn't have otherwise. Additionally, you can decide when your solar savings begin, offering more flexibility and potential long-term savings."

Comparing Long-Term and Short-Term Savings Strategies

When choosing the right solar loan, consider how soon you want to see savings. Typically, a shorter loan term results in a longer payback period but leads to greater lifetime savings. On the other hand, a longer loan term provides a shorter payback period but yields lower overall savings.

For instance, if you reside in New York, where electricity rates are around 20 cents per kWh and increasing by an average of 3% annually, you have the option to opt for immediate bill savings with a longer loan term or prioritize maximum lifetime savings with a shorter loan term.

The 12-year loan term strikes a balance between immediate bill savings and long-term cost efficiency. While the 20-year loan provides the highest initial savings, and the 8-year loan offers the most substantial savings over the full 25-year warranty of a solar system, the 12-year term is a popular choice among solar.com customers for its moderate benefits in both the short and long term.

Solar loan interest rates

If you choose to finance your solar installation with a loan, you will likely encounter interest charges as part of the arrangement.

Similar to mortgage rates, solar loan interest rates fluctuate based on broader economic conditions. Interest rates dropped during the pandemic but have been on the rise since mid-2022.

Although macroeconomic factors are beyond your control, there are two steps you can take to secure a lower interest rate:

1. **Boost your credit score**: The typical minimum credit score required for a solar loan is around 650 FICO. Improving your score to between 680 and 719 can help you qualify for a better rate, while a score above 720 can position you for the best rate available.

2. **Act quickly**: With interest rates expected to keep climbing throughout 2023, securing a loan and locking in a rate as soon as possible can help you avoid paying higher interest later on.

Remember, although interest rates on your solar loan are important, it may not be wise to wait for rates to decrease significantly. This is akin to ignoring a $20 bill in favor of picking up a $1 bill.

Investing in solar energy is a long-term strategy, and the earlier you make the switch, the more savings you can accrue over time.

Eligibility Criteria for Solar Financing

Like other types of financing such as a mortgage or auto loan, obtaining a solar loan requires meeting specific criteria set by lenders. While requirements may vary depending on the lender, typical qualifications often include:

A minimum FICO credit score of 650 or higher
A debt-to-income (DTI) ratio below 50%
The primary borrower's name must be on the title of the property where the solar panels will be installed

In some instances, including a co-borrower with a solid credit score and favorable DTI can improve your chances of qualifying for a solar loan. Keep in mind that different lenders may use varying types of credit scores, and the one you might access online for free may differ from what solar lenders utilize in their evaluations. To avoid any unexpected issues, be sure to verify your FICO score before starting the loan application process.

Solar Financing: Smart Investment or Potential Pitfall?

Some financial advisors often encourage individuals to avoid debt or to carefully consider the distinction between good debt and bad debt. When it comes to solar energy, there is substantial evidence to suggest that taking on debt to finance solar installations can be considered good debt.

Good debt, as defined by How Stuff Works, refers to an investment that either increases in value or generates long-term income. Examples of good debt include pursuing a college education, which can lead to higher earning potential, or taking out a mortgage to buy a home, which can increase in value over time and provide stable housing costs.

Similarly, investing in solar energy can be a wise financial decision as it helps protect against rising electricity prices, as demonstrated in the accompanying graph. This long-term financial benefit supports the notion that solar debt is a form of good debt.

Finding the Right Solar Lender

Here is an alternative paragraph that discusses finding a solar lender:

There are several options for finding a solar lender. You can independently search for a lender, utilize one recommended by your solar installer, or collaborate with an Energy Advisor from solar.com to compare rates from trusted lenders. While your bank or credit union can finance a solar loan, they may not offer the flexible options like combo and reamortization loans available through specialized solar lenders. Your solar installer may suggest a lender they frequently partner with, but this may limit your ability to shop around for the best rates. In contrast, a solar.com Energy Advisor can guide you through the loan selection process, simplifying what can seem daunting by providing expert advice and support.

PACE Solar Financing: Empowering Sustainable Energy

PACE (Property Assessed Clean Energy) is a government program that provides a financing option for homeowners looking to install solar panels, especially those with lower income or credit challenges. Homeowners can secure the loan against their home, which can help make solar installation more attainable. However, the interest rates for PACE loans can be higher than traditional loans, so it's best considered as a last resort option.

If a homeowner's debt-to-income ratio is less than ideal, PACE financing may be a viable choice for going solar. It can still be financially beneficial for those with high utility bills. A key advantage of PACE financing is that the remaining balance of the solar loan can be transferred to the new homeowner if the house is sold, simplifying the process for both the seller and the buyer.

PACE programs are available in several states, including California, Florida, and Missouri, according to the Department of Energy.

Key Takeaways

Investing in solar energy is a substantial commitment that can provide a great payoff over time. If upfront cash isn't an option, solar loans offer a viable path to immediate savings. These loans are adaptable, often providing no down payment and offering repayment terms ranging from 8 to 20 years. This flexibility lets you tailor a loan to fit your budget, effectively giving you the power to set your own electricity rate.

Solar loans frequently asked questions

Timeframe for Repaying Solar Panel Costs

Solar loan terms usually last between 8 and 20 years, though many loans offer the advantage of allowing penalty-free pre-payments. This means that you have the flexibility to pay off the loan earlier without incurring any extra charges.

On the other hand, if you opt to pay cash for solar panels, you can expect the payback period to be around 6 to 10 years. This timeframe can vary based on factors such as your utility electricity rates, energy usage, and the amount of sunlight your area receives.

Impact of Solar Loans on Debt-to-Income Ratio

Taking out a solar loan can impact your debt-to-income (DTI) ratio because it adds to your monthly debt payments. For instance, if you originally had $500 in monthly debt payments and $1,500 in income, your DTI would be 33%. However, with the addition of a $150 monthly solar loan payment, your DTI would rise to 43% ($650/$1,500).

What does reamortize mean?

Reamortizing or recasting a loan involves making a significant lump sum payment toward the principal loan balance. This strategy reduces the remaining loan balance, leading to lower monthly payments, as illustrated in the table below.

Here is an alternative paragraph that explains the difference between refinancing a loan and reamortizing a loan:

Refinancing a loan involves taking out a new loan to replace the existing one, often with the goal of securing a better interest rate or changing the loan term. In contrast, reamortization adjusts the current loan by recalculating the payment schedule based on a lump sum payment made toward the loan principal.

This can lower monthly payments without changing the loan term or interest rate, while refinancing may offer more flexibility but does not typically require an upfront payment.