Financing Solar Panels 101 | Bankrate

• System size: 8.6 kW
• Total cost: $31,558
• Monthly electricity bill: $141.41
• Solar tax credit savings: $9,467
• Payback period: 13 years
• 20-year savings: $11,848

Your home’s location and energy consumption will ultimately determine what solar panels might cost you. You can get a cost and savings estimate by answering a few questions. After entering your address, monthly bill, and a few other questions, you’ll get results about solar panel costs and savings predictions for your home. It will also break down the environmental impact your installation could have.

In addition to looking at the savings that can add up in the big picture, be sure to consider the new tax credits included in the Inflation Reduction Act. For example, if your 30 percent credit works out to be $9,000, and you owe $7,000 in taxes next year, your federal tax liability will shrink to zero — and you’ll get to roll over that remaining $2,000 credit to the next year.

Best ways to finance solar panels

If you don’t have the cash on hand to cover the total cost of going solar, consider these solar panel finance options.

Personal loans

By and large, the best type of solar panel financing is probably a personal loan. A personal solar panel loan will come with fixed interest rates and fixed monthly payments that never change during the life of the loan. Some home improvement loans have higher limits or longer terms to make it easier to pay for more expensive options.

Key benefits

Personal loans typically offer faster access to cash — sometimes in as little as a day or two — and many come with no origination fees. Also, personal loans are unsecured, so you don’t have to put your home up as collateral or have a ton of home equity to qualify.

Key drawbacks

To qualify for the lowest rates, you’ll need good or excellent credit. If you don’t have the best credit, you may get stuck with sky-high interest rates that make financing solar panels expensive.

Who is this best for?

Financing a solar panel purchase with a personal loan may be a good option if you need the loan proceeds quickly. It also makes sense if you have solid credit scores and will likely qualify for the most competitive interest rates.

FHA and Fannie Mae loans

There are also two types of mortgage loans — the FHA 203(k) loan and the Fannie Mae HomeStyle Renovation loan — that can help you simultaneously finance the purchase of a home and the installation of solar panels, as well as other renovations or upgrades.

Key benefits

Because the Fannie Mae HomeStyle Renovation loan allows as much as a 97 percent loan to value ratio, it’s easier to qualify for than some other loans. Also, you can use either of these programs to refinance your existing mortgage and pay for your solar upgrades, too.

Key drawbacks

Compared to alternatives like personal loans, and home equity loans/HELOCs, the FHA 203(k) loan may have higher interest rates. The Fannie Mae HomeStyle Renovation loan rates tend to be lower than the competition. Still, often there’s more red tape involved in the application, and remodeling work must be completed within 12 months of getting the money. Fees and closing costs are usually higher as well.

Who is this best for?

The FHA and Fannie Mae loans may be the way to go if you’re purchasing a home and wish to have solar panels installed simultaneously. They can also be smart choices if you aren’t eligible for personal loans with reasonable rates.

Home equity loans and HELOCs

If you have a lot of equity in your home and prefer to borrow against it, you can also consider a home equity loan or a home equity line of credit (HELOC). Home equity loans work like personal loans, as they have fixed interest rates, fixed repayment timelines and consistent monthly payments.

HELOCs, on the other hand, give you a line of credit you can borrow against like a credit card. With HELOCs, you’ll typically have a variable interest rate, which means your payment could go up or down as your account balance and interest rate fluctuate.

Key benefits:

If you can use your home equity and have good or great credit, home equity loans and HELOCs will usually come with low interest rates and fair terms. Another perk is that you may be able to deduct the interest you pay on them and save money on your taxes.

Key drawbacks

You can usually only borrow up to 85 percent of your home’s value across a first mortgage and second loan. In addition, home equity loans and HELOCs come with an application process that is more involved than the one for personal loans.

Who is this best for?

Home equity loans and HELOCs are a good choice if you have sufficient equity in your home and are determined that solar panels are likely to add value to it. These financing options are also worth considering if you don’t qualify for a personal loan with a good rate because of your credit.

Power purchase agreement or solar lease

For solar buyers who want to avoid upfront costs and not have the responsibility for solar panel maintenance, a power purchase agreement (PPA) or solar lease may be a good fit. Both options can lead to lower energy costs, but the main difference is what you pay for in your monthly bill. In a PPA, you pay a specific price per kilowatt-hour (kWh) of solar energy generated, while in a solar lease, you pay a fixed monthly rate. 

Key benefits

Both options have low upfront costs and lead to energy bill savings, plus you will power your home with clean energy instead of electricity from the grid. The solar company you have an agreement with is responsible for any needed maintenance or repairs to your solar system. If something works improperly, it is not up to you to fix it. 

Key drawbacks

Solar lease and PPA contracts extend 25 to 30 years. If you plan to move homes, you must find someone willing to take over your contract. If they won’t, you may have to pay a hefty cancellation fee. Also, rates may increase over time, so review your contract for any annual rate increase information. Solar leases and PPAs do not qualify for incentives, like the federal solar tax credit or net metering. Over time your savings will be lower than if you purchase a solar panel system with cash or a loan. 

Who is this best for?

Solar PPAs or leases are best for those with financial restrictions but still want to power their home with solar energy and reduce their carbon footprint. 

Solar panel tax benefits

Solar panel costs can add up quickly. Fortunately, there are some tax incentives available to help you offset the costs.

One of the best benefits is the federal Inflation Reduction Act’s 30 percent tax credit on solar installations, available for homeowners who purchase and install solar panels on their primary or secondary residence in the United States. The credit runs through 2032 in an effort to continue to spur the solar shift. In 2033, the credit will drop to 26 percent, and in 2034, it will decrease to 22 percent before phasing out in 2035.

Depending on where you live, you may also be eligible for state-sponsored tax incentives. For example, some states allow you to exchange your surplus solar power for credits on your energy bill through a process called net metering. In other states, solar panels are exempt from sales tax. 

Next steps in installing solar panels

Solar energy is quickly growing in popularity, with some states even requiring that new homes come with solar panels. Solar offers reduced utility costs and the environmental upshot of generating renewable energy, but do your homework before committing to such a large project. You may even consider talking to people who have already installed solar panels to get their reviews of the systems they selected, or any valuable insights or recommendations.