Homeowner Financing: Solar Projects
If you’re considering a solar panel installation for your home, you’re in luck. Costs for solar hardware have dropped by as much as 60% since 2010, meaning that solar is more affordable than ever. Using the energy generated by their systems, many homeowners are able to significantly reduce or even offset their utility bills, meaning that solar panels will eventually pay for themselves.
However, solar energy systems are still a significant investment, especially since it will take several years for many homeowners to achieve a return on their investment. That’s why it’s important to consider the specifics of your home and your energy use, as well as getting to know the types of incentives, financing, and other programs that can help you afford your solar energy system. This guide will help you familiarize yourself with those options, and it’ll also introduce some tools to help you understand your system’s value and your energy savings.
Jump to content:
- Solar Rebates, Tax Credits, and Tax Exemptions
- Financing a Solar Installation
- Third-Party Ownership Systems
- Community, Group, and Shared Solar
- Calculating Your Return on Investment
- Talk to an Expert
Solar Rebates, Tax Credits, and Tax Exemptions
The great news is that when you purchase solar, you are most likely eligible for multiple cost-mitigating incentives. These can help defray the costs of a new system and improve your panels’ ROI, making the payback time very attractive for many homeowners. The specifics of these incentives can vary vastly, depending on your home’s location and the energy provider you use. Here’s a rundown of the types of incentives available to homeowners.
The Federal Investment Tax Credit (ITC). If you’re paying for your solar energy system upfront, the ITC is one of the most useful ways to save on your project. This program currently offers a tax credit worth 30% of your solar energy system’s total cost.
That percentage is calculated from the cost of your solar energy system equipment plus any associated “qualified expenditures.” The government defines these as “labor costs for on-site preparation, assembly or original system installation, and for piping or wiring to interconnect a system to the home.” See the Department of Energy’s ITC reference page for more information.
Buyers may apply these credits when they file their federal income taxes. After calculating taxes, the value of the credit is deducted from the tax liability, or the amount owed after calculating yearly earnings, assets, and deductions. If the tax liability is less than the value of the credit, the filer may roll over the remaining amount to use on next year’s taxes.
If you are planning to purchase your solar energy system sometime in the future, you should know that the value of the ITC may have changed. In its current iteration, the value of the credit is scheduled to reduce to 26% after 12/31/2019 and then down to 22% after 12/31/2020. If you are planning to use the ITC to purchase your solar energy system, you may want to plan around these changes.
State Government Incentives. Some state governments offer their own programs for solar energy systems, as well. The details of these programs can vary vastly depending on your state. For instance, residents of Arizona may be eligible for a tax credit worth 25% of their solar energy system. Statewide tax credit programs like these are not common, but they do exist in some places. Check with your state government for more information.
Other states offer exclusions in property taxes. This is a much more typical benefit provided by state governments. The value that your solar energy system adds to your home is not reflected on your property taxes, thereby providing some financial relief to solar households.
Frequently, states will offer exemptions to sales tax on solar energy systems. That means you can buy your solar energy equipment free of the sales tax applied to retail purchases. Depending on the cost of your system and the sales tax rate in your state, this can represent a value of several hundred dollars.
Another common type of state incentive is a rebate offered per-kilowatt hour up to a certain dollar amount. Keep in mind that state legislatures frequently revise, amend or anul the laws around statewide solar incentives, so the details of these programs are subject to change.
Local Government Incentives. Similarly, many local municipal or city governments offer their own incentives for solar panels. Often, these are administered as local sales or property tax exemptions. They may also take the form of grants, rebates in a flat dollar amount or per-kilowatt up to a certain amount. In that case, the incentives are usually managed through regional utilities or utility commissions. Your Modernize representative can connect you to a nearby installer or solar manufacturer who will have a lot more information for you about local incentives.
Net Metering. Net metering is a very popular form of incentive for residential solar households. In this situation, homeowners’ solar energy systems are connected to the local power grid, where they can return surplus solar energy generated by their panels to their energy provider.
The energy provider then credits them for each kilowatt hour returned to the grid. A special grid connected to their home calculates both the amount of energy the home draws from the grid and the amount returned to the grid. Homeowners are then billed only for their “net” energy use.
Although most states have approved net metering incentives, the implementation of net metering programs is often left to local government or regional energy providers. This means that the availability of these programs may vary vastly depending on your local government and your energy provider.
Additionally, net metering is considered very controversial in some places, and so net metering incentives are often revised or revisited by state and local legislations. You should be aware that the specifics of net metering programs in your area may be subject to change.
Other Programs Through Your Energy Provider. Occasionally, energy providers offer their own flat rate or per-kilowatt hour rebates, in addition to net metering incentives. You’ll need to check with your local energy provider for the specifics of these programs.
Financing a Solar Installation
Solar panels can easily cost several thousand dollars, which means purchasing your panels outright may not be an option, particularly since some rebates and credits may not be available instantly. If that’s the case, you do have several options at your disposal to finance your solar energy purchase.
HomeStyle Energy Program. Fannie Mae offers this mortgage program for homeowners seeking to improve the energy efficiency of their homes. Essentially, Fannie Mae administers a mortgage loan worth up to 15% of the as-completed value of the home—in other words, what your home will be worth once the solar panels are installed.
This loan is available to homeowners who are purchasing a new home or refinancing their existing mortgage and plan on using the loan funds towards a qualifying energy improvement, like a solar energy system. For those homeowners refinancing, the program offers a limited cash-out refinance. Funds from the refinancing can be used toward the purchase of a new solar energy system. You may also use loan funds to pay off a PACE loan or other debt associated with the purchase of a qualifying solar energy system.
You’ll have to meet certain requirements, such as a particular loan-to-value ratio on your current mortgage loan, in order to be eligible for the limited cash-out refinance. Visit the official loan program page for more information.
Solar Loans. Many third-party lenders and national financial institutions offer specialty loan products for homeowners intending to purchase a solar energy system. These may be administered as secured or unsecured loans. Secured loans are protected with an asset, such as the mortgage deed to your home. Unsecured loans do not require the loan recipient to provide an asset for collateral; however, the interest rates may be higher and the loan amounts smaller than through secure loans.
The details of these programs vary from lender to lender. Therefore, it’s worth consulting with your bank, mortgage lender, credit union or other financial institution to see if they have a solar financing program.
Home Equity Loans. It’s a general finance option for the home, but many homeowners also use home equity loans to purchase solar energy systems. Home equity loans allow homeowners to borrow funds using their home’s equity as collateral—in other words, the percentage of their home loan they have paid off.
These loans have fairly low interest rates, which makes them an attractive financing option. Solar energy systems typically improve your home’s property value, so home equity loans are generally a smart investment. However, in order to qualify for this loan, you must have existing equity in your home.
State or Local Government Loans. Some state and local governments offer loan programs administered through private lenders for residents intending to purchase solar energy systems. Many of these loans have very low interest rates, typically under 5%. However, these loan programs are not available everywhere. Check with your state or local government to see if such a program exists.
Financing Programs Through Your Solar Energy Installer or Manufacturer. Some solar energy dealers, installers, and equipment manufacturers offer their own financing programs for homeowners who purchase and install through their companies.
These options are typically less affordable than other loan options, since many solar companies apply an origination fee to the loan. They are often administered as unsecured loans; however, some may use your solar panels as collateral. Interest rates may be slightly higher on these loans than other third-party loans.
Property-Assessed Clean Energy (PACE) Loans. In some areas, you may be able to take advantage of a PACE loan for your solar energy system. The advantage to PACE loans is that the debt owed for the solar energy system is incorporated into the property assessment for the home. Thus, if you happen to sell your home, the new homeowner takes over your PACE loan (and solar energy system) and continues repaying the loan. Loan payments are added to property taxes and paid together.
The loan is administered through an approved lender, often with fairly low interest rates. Loans are repaid over a set period of time, typically 10 to 15 years.
However, residential PACE loans are not common. Although many states have passed legislation enabling PACE loans, very few areas actually have active programs and approved PACE lenders, especially for residential solar projects. Contact your local government for more information.
Third-Party Ownership Systems
There are other paths to solar besides purchasing a solar energy system. For some homeowners, it makes more sense to allow a third party to pay for their solar energy installation and then either pay to lease the system or purchase the energy generated thereon from the owner at a reduced rate.
Leasing a Solar Energy System. In a solar lease, the homeowner does not own the solar energy system installed on their roof, nor are they responsible for the system’s maintenance. Instead, they pay a lease to use the solar energy system. However, any tax credits associated with the installation go to the solar company, rather than the homeowner.
These leases are frequently available for little-to-no money down. The price of the “rent” on your system is typically determined using the estimated amount of energy the system is expected to generate. The specifics of your lease may vary, though, depending on your solar provider.
Power Purchasing Agreement (PPA). A power purchasing agreement is very similar to a solar lease. A third-party owner pays to install a solar energy system on your home, and assumes both the burden of maintenance and any tax credits associated with the system.
However, instead of charging you rent to use the system, the third-party owner sells you the energy generated by your system at a greatly reduced rate. PPAs are typically set for a certain term, usually somewhere between 10 to 25 years. After the agreement expires, the homeowner can choose to either extend the agreement, have the owner remove the system, or purchase the solar energy solar at a reduced rate. As with a PACE loan, the PPA is attached to the home, so if a homeowner chooses to sell their home, the new homeowner may take over the agreement.
Community, Group, and Shared Solar
In some areas, you may have access to established community and shared solar resources. In this situation, your solar panels may be housed in an offsite array connected to your home. Or they may be situation on your roof—and all your neighbor’s roofs. Here are a few ways community, group, and shared solar take form.
Community Solar. In this arrangement, solar arrays are usually housed offsite. The arrays may be owned by a nearby neighborhood or community, or they may be owned by a third-party investor. In the first situation, neighbors pool their money to purchase an array together. In return, communities are able to enjoy the benefits of low-cost electricity.
Group Purchasing. In a group purchasing situation, panels are installed on individuals’ homes; however, they are able to take advantage of bulk discounts when multiple homeowners in their neighborhood purchase solar together.
If shared solar resources are not available in your area, you can always change that. The Department of Energy has a guide to help homeowners and individuals who want to create their own shared solar resources.
Calculating Your Return on Investment
Grants and rebates are not the only way to save on solar. You’ll also save on your utility bills, savings which eventually offsets the cost of your purchase. However, calculating the length of time it will take to achieve payback can be difficult, because it depends on a huge variety of individual factors. Your home’s climate and its location, the shade on your roof, and the angle and size of your solar panels can all influence how productive your panels actually are. You’ll also need to consider your home’s energy use. Luckily, there are a few tools at your disposal to help you make those estimations.
Modernize Solar Calculator. Modernize provides a free resource to homeowners looking to calculate the potential value of their solar panels. This tool looks at your home’s roof using data from the Department of Energy’s Sunshot Initiative to evaluate your panel’s actual solar potential. We also factor in average electricity rates in your area, as well as any rebate that is available to you, in order to help you get a better feel for your solar energy system’s return on investment.
PV Value Tool. This tool is recommended by the US Department of Energy to help you understand how various factors, such as the system size, age, tilt and other aspects impact the amount of energy you’re able to generate. After creating an account, the system finds your home’s latitude and longitude and allows you to input information about your new unit to find your system’s value.
Talk to an Expert
Calculating the value of a solar energy system is complicated. So after you’ve looked at your options, it’s often helpful to talk to a solar expert. At Modernize, we’re able to connect you directly to approved solar experts who can help you evaluate the best system for your property, as well as the types of rebates and incentives available to you. Contact us today for a free solar quote.