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Home Solar Financing 101

I’ve been researching going off the grid and looking into home solar systems. I’d love to get one for free, like this lucky Richmond mom. But somehow, my lucky stars aren’t aligned on this one.

The two main questions you are going to need to answer are: 1) does my home receive enough sun? and 2) how am I going to finance my residential solar system?

One of the most important questions for many homeowners who want to install a home solar system is, “How will I pay for it?” A typical solar photovoltaic installation costs about $20,000 to $50,000, depending on size, and even cheaper thin film photovoltaics or solar thermal systems can cost a significant amount upfront.

Fortunately, there are many different home solar financing options available to help make home solar systems more affordable for homeowners. Here is a selection of the financing options currently available:

Home Equity Loans

Home equity loans have been the most common type of home solar financing for many years. Recently, they have become an option for even more homeowners, because many home equity loan providers are now starting to calculate the value added to the home by solar panels (more than $20 for every $1 of annual energy savings, according to the Appraisal Institute) when calculating the cumulative loan to value ratio (CLTV).

Energy Efficient Mortgages (EEM)

Energy Efficient Mortgages (EEM) are designed to make installing solar panels or other energy efficient improvements more affordable for homeowners. They allow homeowners to add the cost of qualifying home improvements to their mortgage without increasing the down payment. In order to qualify for an EEM, a home must be rated on its energy efficiency by a qualified energy auditor and the improvements must be “cost-effective,” that is, the average monthly energy savings must be greater than the average monthly cost of the EEM. Conventional EEMS are available for homeowners interested in purchasing a home with energy efficiency improvements already installed, while Federal Housing Authority (FHA) EEMs are available for homeowners interested in installing new improvements. Veterans Affairs also offers EEMs for qualifying military personnel and veterans.

PACE Financing

A relatively recent development in the home solar financing market, PACE financing stands for Property Assessed Clean Energy. In essence, the PACE program allows cities to offer low interest loans to homeowners interested in installing a home solar system. Homeowners pay little or no upfront cost to purchase the system, and repay the loan gradually with their property taxes. Should the house be sold before the loan is fully repaid, both the solar system and the loan will transfer automatically to the new homeowner. Unfortunately, expansion of the PACE program has been hindered by a Federal Housing Finance Agency (FHFA) ruling that is currently being challenged by PACE supporters. Be sure to stay on top of developments regarding this useful financing option!

Solar Leasing and Solar Power Purchase Agreements (PPA)

Solar leasing and solar PPA are a good way to enjoy many of the benefits of solar panels without the high upfront cost. Purchasing, installation, maintenance, and repair are taken care of by the solar company in exchange for a 10-20 year contract in which the homeowner agrees to pay a monthly fee to lease the panels (solar leasing) or to purchase the energy generated by the panels at a set rate per kilowatt-hour (solar PPA). Solar leases and PPAs are especially well suited to homeowners who want immediate savings on their energy bills with no upfront cost, homeowners with poor credit history or who are otherwise unable to finance the purchase of solar panels, and homeowners who are unable or unwilling to perform maintenance on solar panels themselves.

Peer-to-Peer Lending

Peer-to-Peer (P2P) lending is a unique home solar financing option that is growing in popularity due to the rise of popular P2P lending websites such as Prosper and Lending Club. P2P lending works by making it easy to collect microloans of as little as $25 from fellow members of the lending site. In many cases, these websites are able to offer lower interest rates than more traditional lenders, making them an attractive source of funding for homeowners willing to take a chance on an unconventional source of financing.

In addition to these different financing options, federal and state governments also offer a variety of tax breaks, grants, low interest loans, and other incentives that can make purchasing and installing a home solar system even more affordable. Solar companies are generally well informed about locally available incentives and in many cases will even help their customers apply for them.