How Does Solar Financing Work?

A solar panel installation is a large investment for property owners. While many homeowners pay cash for their system, there are plenty of solar power financing options for homeowners that don’t have the investment up-front. Every homeowner that is planning on going solar should familiarize themselves with these different financing options and how they work before making a decision on how they’re going to pay for their solar panels.

So, how does solar financing work? The two main types of solar financing are solar loans and solar leases. Both solar financing options allow homeowners to get solar panels installed with no money down, and result in immediate savings.

The main difference between the two is that with a solar loan, the homeowner will own their system with monthly payments. With a solar power lease, the homeowner is essentially renting the panels from the leasing company and paying for the power that the panels create. The situation that will best fit the homeowner’s needs is dependent on a number of factors, which leads us to the question: how does solar panel financing work?

Solar Loans

Homeowners who prefer to own their solar panels typically opt for a solar loan. This makes it so homeowners can go solar for no money down and make monthly payments on their system that are less than their power bill. So, not only do homeowners start saving on their power bill immediately, but the money they would have been throwing away at the power company is now being put towards owning their solar system. Solar power loans allow homeowners to get the most value out of their system, and are primarily designed for homeowners looking to reap long-term savings, as opposed to short-term cash flow.

The Benefits of a Solar Loan

Owning yields the highest ROI of all the solar project financing options, and presents other opportunities for savings through tax credits and tax incentives as well. Some of the benefits of financing solar with a loan are:

• Start Saving Immediately - With a solar loan, homeowners can pay nothing down, and have their solar installed so that they start zeroing out their power bill cost immediately. Their monthly payment will be less than what their power bill was prior to installing solar, so they will be saving money from the get-go. On top of that, the money that they were throwing away at the power company will now be put towards owning their solar system - so once they pay off the system, they will be paying almost no power bill, and no solar payment, and will be doing nothing but saving from there on out.
• The Federal Solar Tax Credit - Homeowners who have a federal tax liability stand to save a large amount of money on their installation by going with a solar loan and owning the system. Paying for the system with a loan means the homeowner is able to utilize the 30% Federal Solar Tax Credit, which means that they can deduct 30% of their solar installation costs from their tax liability.
• Savings Compound Over Time - Another great thing about owning solar is that savings will compound over time. As electricity rates inevitably increase, a homeowners’ solar payments are fixed, so they will be saving more and more money the more expensive electricity gets. It’s hard to predict just how much this will save them in the long run as it’s hard to predict how much electricity rates will go up.  If SDGE’s 11% proposed hike next year is any indication, then likely the savings will be greater than we can even imagine at this point.
• Ownership of Panels adds to home value - Recent studies show that installing solar can add an average of around $20,000 to a home. Having that system paid off and ready to sell without strings attached can make a home more attractive to buyers. Selling a home with a solar lease attached to it can be somewhat complicated, but an owned system ensures that the sale of the home with the solar system can proceed smoothly.

Types of Solar Loans

Solar panel loans are very similar to most home improvement loans when it comes to basic structure, terms, and conditions. In some states, subsidized solar energy loans with below-market interest rates are offered by local governments. Much like other loans, there are two major types of solar loans: those that require collateral, and those that don’t.

The Mosaic Solar Loan

At SunPower by Stellar Solar, we offer a loan through Mosaic, one of the nations top solar loan companies.  There are three different options for Mosaic loan terms:

• 10-year loan at 3.99%
• 15-year loan at 4.99%
• 20-year loan at 5.49%

The Mosaic solar loan also boasts no prepayment penalties and very little to no loan fees.  With this loan, monthly payments will be much less than the homeowner's electric bill and are fixed for the length of the term. (These solar panel financing rates are based on approved credit, and are applicable as of 8/1/2018 and are subject to change.)

Who Provides Solar Loans?

With the recent explosion of solar adoption, many different institutions provide solar loans to homeowners. The different types of institutions providing solar loans include, but aren’t limited to:

• Solar Panel Manufacturers  
• Credit Unions
• National Lending Institutions
• Certain local utilities
• Certain local municipalities through PACE
• Banks

The solar installer should be able to match the homeowner with the loan and financing institution that is right for them.

Use Home Equity to Purchase Solar

Solar loans that are attached to the home typically have lower credit score requirements, require no money down, and have no prepayment penalties either. Those include:

Home Equity Loans - A common type of “secured” solar loan is a home equity loan, where homeowners can borrow against their home equity to pay for their solar. These types of loans typically involve 7-20 year terms and require interest rates of 5%-7.5%.   Homeowners may be able to write off the interest on the loan, they just need to talk to their financial advisor to make sure.

Home Equity Line of Credit - With a home equity line of credit, the bank gives the homeowner a line of credit through a credit card or checkbook instead of providing the entire loan up front. The homeowner can draw upon the line of credit as needed over an agreed upon period, much like any other line of credit. Much like the home equity loan, the homeowner borrows against the equity of their home, and as the homeowner pays back the loan the amount of available credit increases. The homeowner can typically borrow as much or as little as they need in the draw period, which is typically 10-15 years. Homeowners may be able to write off the interest on the loan, they just need to talk to their financial advisor to make sure.

Property Assessed Clean Energy Loans (PACE) - With a PACE loan, The homeowner pays back the loan through assessments added to their property tax bill over the next 10-20 years. How it works is that local governments offer bonds to investors for providing capital for energy retrofit loans on commercial and residential properties. PACE loans are good for homeowners who may not have the best credit score, as they are mostly granted based on home equity.

Solar Leases

With solar leases, a third party owner, typically the solar installer, installs solar panels on the home and charges the homeowner for the power the solar produces. This means that homeowner does not own the panels but will be paying the solar company a monthly bill that is less than their prior electric bill. This allows for immediate savings, so solar leases are typically better for homeowners looking for immediate and short-term cash flow.

The Benefits of a Solar Lease

• Start Saving Immediately -  A solar lease allows homeowners to get installed for no money down and start saving on their power bills immediately. The payment they make to the solar company will be less than what their power bill was, allowing them to save from the get-go.
• Immunity to Electric Rate Hikes - The homeowner is buying power from the solar company, and not the power company, so any hikes in the rate of electricity will no longer affect the homeowner. This means savings compound as electric rates increase.
• Maintenance is Taken Care of - With a solar lease, the leasing company is responsible for the upkeep and maintenance of the system for the lifespan of the lease. Typically leases have a production guarantee, and if the production is not up to the lease agreement, the company will reimburse the for underproduction.
• No Collateral Involved - Solar leases allow homeowners to go solar without having to use their home equity as collateral. This allows homeowners to use their collateral for other purposes or home improvements.

While solar leases can be ideal for homeowners who do not have the collateral for a solar loan or do not want to own the system, they provide less value in the long-term than owning a system. The terms of a lease are typically 20-25 years, at the end of which the solar company uninstalls the panels, or sells them to the homeowner. If the homeowner had been making that lease payment towards owning their system instead, they could potentially pay off an owned system in 5-10 years, after which they would be making no payment towards their solar or their power bill, and instead would be reaping pure savings. Homeowners who go with a solar lease instead of a loan are also not eligible for the Federal Solar Tax Credit.  Despite this, leases can be a great option for retired people, those without tax liability, or those with a fixed income.

Lease VS. PPA

With both a lease and a PPA (Power Purchase Agreement), the homeowner is buying the power their panels create from the leasing company. The difference between a lease and PPA is that with a lease, homeowners pay a fixed monthly payment, and with a PPA, they agree to pay a certain amount per kWh. With a PPA, if the homeowner's solar panels create more power one month, the bill will be higher. With both leases and PPA’s, there is a possibility that the leasing company will add an escalator, which will increase the price of the power or the monthly bill around 1%-3% a year. Homeowners should be clear on the terms of their lease or PPA before agreeing on this type of financing.

So, when looking at how solar power financing works, it’s clear that there are a ton of factors that determine the right path for homeowners. Whatever the situation, homeowners should talk with a solar energy consultant about all the factors going into their solar panel financing situation to find the best fit for them. We at SunPower by Stellar Solar can answer any solar financing questions homeowners may have, so contact us today to learn about all the options.