The complete guide to how to pay for solar panels
Pay cash? Get a loan? Lease? PPA? There’s a lot of options. Learn how they all work here.
If your house is suitable and you're in a good location, solar panels can be one of the better financial investments that you make. Solar is getting cheaper all the time, but it does comes with a pretty big upfront price tag. Figuring out how to pay for solar is what this article is about.
Here’s a pretty complete list of the different ways you can pay for solar panels:
- Pay cash.
- Take out a traditional loan, such as a home equity loan or HELOC.
- Get a “solar loan” from a loan provider that specializes in working with solar homeowners.
- Get a lease or power purchase agreement (PPA).
- Use PACE financing.
- Look for low income grants for solar.
- Get a HomeStyle Energy Mortgage from Fannie Mae.
That’s a lot of options to consider. Let me walk you through each of them.
Paying cash for your photovoltaic system simply means saving up enough money so that you can write a check to your installer to cover the complete cost. This means you will own the system outright.
While this may be the most straightforward way of paying for your system, it’s not the easiest because it means you need to save enough money to pay for the full cost of the system before tax credits.
This is because the federal tax incentive and many state incentives for solar are given as a credit on your taxes. You apply for the credit when you file your taxes, and then wait for your tax rebate check to come.
If your solar tax credit is larger than the tax you paid in a year, you will have to wait even longer to get your full rebate, because unused solar tax credits can be rolled over to future years.
That wait period means that you need extra cash to cover the pre-rebate cost of the system. Most people don’t have that amount of money sitting in the bank, so only a minority of people pay for solar this way. But if you can afford to, paying cash in many ways is the simplest way to go.
Disadvantages of paying cash for your solar panels
If you decide to pay cash, the main financial consideration is that you lose the opportunity of being able to invest the money you will spend on solar in an asset that might have a higher financial return than the cost of a loan.
For example, let’s say you need $10,000 to pay for your photovoltaic system. You go to the bank, and they tell you that you can get a 4.5% rate on a home equity loan. If your $10,000 would have otherwise have gone into a 401(k) retirement plan, and your retirement portfolio is averaging a 6% return, you might come out ahead financially by contributing to your retirement account (especially because it’s tax-deferred) and then taking out the loan to pay for your solar panels.
Get a traditional loan
Another option is to go to a bank or online lender and get a traditional loan. Two options include a home equity loan and a home equity line of credit. Covering the ins-and-outs of personal finanace is outside the scope of this website, so read this article by Business Insider that explains how these loan products work and how they differ.
Regardless of which product you choose, you may encounter difficulty getting a loan if you don’t have a high enough credit score or haven’t built enough equity in your home yet. If that’s the case, you may have to wait until your home equity and credit score improve, or consider one of the alternatives described later in this article.
There are a couple advantages of paying for your system with a loan. The first is that you don’t need to wait to have a large amount of money saved up before getting your system.
The second advantage is that you might come out on top by putting your money into a high yielding tax-sheltered investment, such as a 401(k), and then paying for your system with a loan, rather than saving your money in a low-yield saving account in order to pay for your system with cash.
Of course markets are volatile, so there’s no guarantee that your investments will give you higher returns than the interest rate you pay on a loan, even if they have in the past. This decision can be made more difficult if you are nearing retirement age, because most people like to have less risk and volatility in their portfolio as they get closer to retirement.
Cash purchase vs loan calculator
Weighing the two options of paying cash versus taking a loan can be complicated, so this calculator can help you decide.
Enter your loan amount and assumptions about the rate of return on your investments, and it will tell you whether you’d end up earning more money by investing your money and paying your system off over time with a loan, or if you’d spend less money paying cash.
Keep in mind that with any type of investment past performance doesn’t predict future gains, so treat any numbers you calculate here as just an estimate.
Get a solar loan
A solar loan is a loan you get from a company that specializes in lending to homeowners who are installing a solar energy system on their home. Mosaic is the largest lender in this category, but there are many others.
These loans differ in a few important ways:
- They are usually unsecured loans, which means they don’t require you to use your house as collateral.
- Solar loans can be easier to obtain than a loan from a traditional lender. This means that if you are denied a home equity loan or HELOC from your bank, you might be able to qualify for a solar loan.
- Getting a solar loan requires you to be extra careful in understanding the terms and fees of the loan. Otherwise, you could end up paying much more over the term of the loan than you expect.
Secured vs unsecured loans
A secured loan is one that requires you to put down collateral, such as your home. If you end up defaulting on the loan, the lending institution can recover their money by using the collateral - for example, by selling your home.
An unsecured loan doesn’t have this requirement. While this may sound like an advantage, an unsecured loan is a higher lending risk for a financial institution. Because of the lender’s higher risk, you will generally end up paying higher fees or interest rates with an unsecured loan.
Solar loans from companies like Mosaic are often unsecured. You can read more about secured vs unsecured loans by reading this article from Investopedia.
Things to watch out for when considering a solar loan
With any type of loan, pay attention to the details of the agreement, such as the fees and payment schedule. But with a solar loan, there can be a few extra gotchas. Here are some basic things to look out for:
- What is the interest rate? The interest rate is simply a percentage of the loan amount (known as the principal) that the lender charges you for the loan. A 5% interest rate on a $100 loan means that the total cost of the loan will be $105.
- Solar loan companies may charge higher than average origination fees. If the financing is arranged through your installer, then the origination fee may be charged to the installer by the loan company, who may pass it onto you by simply increasing the price of the system, effectively hiding the fee. Because of this, it’s very important to ask what the origination fee is so that you know if you’re being charged excessively. On the other hand, it may take a little searching, but it’s possible to find a home equity loan or HELOC without any closing or origination fees.
- Ask about other fees. The possible number of fees charged by lenders is long and confusing. These can include appraisal fees, attorney fees, late payment fees, early termination fees, and more. Read the loan agreement carefully and ask about fees. Here’s a list from Investopedia.
- What is the duration of the loan? Duration means how years you will be making payments. Solar loans can be quite long relative to the amount of money being borrowed - 20 years is common. A long loan duration on the amount of money that is typically required for solar panels is actually a bad thing financially. It lowers the monthly payment to make it seem that you aren’t paying very much, but the long duration means that you will pay much more in interest over time.
- How much of the monthly payment goes toward principal? Part of your monthly payment will be used to pay interest to the lender, and the rest will be used to pay down the principal. Be sure to understand what the ratio is, otherwise you could end up making monthly payments for years that don’t reduce your loan amount as much as you think.
- How much principal will remain at the end of your loan? Don’t assume that at the end of your loan the principal will be reduced to zero. An unscruplous loan will advertise a low monthly payment over a long duration, but leave you with a principal remaining at the end of the term. This type of loan will have you end up forking a lot of money over to the lender and do little to actually pay down your loan.
- What happens if you need to sell your home? The process of transferring your loan to a future home buyer can be complicated, involve fees and, in the worse case, cause a sale to fall through because paperwork with the loan company can cause significant delays. If you think that selling your house during the loan term is a possibility, make sure that you fully understand from the lender the requirements for completing a sale.
That might seem like a lot of things to follow up on, but it’s much better to ask these questions at the beginning than to be surprised later on that you’re locked into a loan with bad terms. Always do your research up front.
Read reviews on your loan company
Most people are used to the idea of checking product reviews online before making a purchase. Make the same effort before locking yourself into a contract worth tens of thousands of dollars with a loan company.
A good place to start is the Better Business Bureau and Yelp. For example, here are links to reviews for Mosaic, a popular provider of solar loans:
Get a lease or power purchase agreement (PPA)
You might have heard about getting solar panels installed on your home for free. What? How is that possible?
It’s not actually free, but it is possible to get solar panels installed on your home for no upfront cost. “Free” solar panels refers to two similar financing options: a Power Purchase Agreement (PPA) and a solar lease. In both cases, the solar company owns the system they install on your home, and you buy the electricity it generates for a monthly fee. Because that fee is less than the normal rate of electricity you pay to the utility company, the net outcome is that you get solar electricity and still save money on your electric bill.
This financing model is sometimes pitched as “free” because there is usually no upfront cost and you have a net savings every month.
While this can seem like great option, there are caveats you need to be aware of.
How do solar leases and PPAs work?
With a lease, you pay a monthly leasing fee that is less than your average electric bill, and your savings are the difference between the two. With a power purchase agreement, instead of a fixed monthly fee, you instead pay for electricity at a reduced rate for the duration of the PPA.
Both are very similar, and which one of these two financing models is offered depends on the company. For example, Sunrun explains that whether they offer you a lease or a PPA depends on which state you live in.
In both cases, there may be little or no upfront cost to you. The solar PV system is installed on your home but is owned by the installer, who makes their money by retaining the tax incentives and by pocketing the difference between the per-kWh price that you pay and the value of the electricity generated by the system.
How can solar companies do this without collecting money upfront?
First of all, let’s go over the business model from the point of view of the solar installer. While solar equipment has gotten significantly cheaper over time, the cost of labor, hardware, and the overhead of running a business still means that the gross cost for a typical home solar system is several thousands of dollars, maybe tens of thousands for a very large system.
If the installer doesn’t collect any money for you, it means that they need to foot this bill. How do they afford to do this?
There’s a few ways. One very important thing is that the installer collects all the incentives, which can be significant. In 2021, this means at least 26% in federal tax rebates, and many states, utilities, and municipalities offer rebates too. Instead of going to the homeowner, like it would if you purchased the system, with a lease or PPA all these rebates go to the company. Use The Solar Nerd calculator and you can see that the savings can be significant.
Companies that offer PPAs also tend to be large, well-capitalized national companies such as Sunrun and Tesla. With significant capital reserves or access to low-cost financing, they have the financial clout to invest in many small-scale power plants (which is what your solar home basically is to them) and earn a healthy return over time. With size, they also have larger purchasing power and can drive down costs through scale.
Finally, these companies are able to treat these solar systems as depreciating assets from an accounting perspective, which allows them to claim a tax benefit as the value of their asset depreciates over time. This is a business tax credit that a homeowner is not able to claim on their personal taxes.
States that allow solar PPAs and leases in 2021
When you sign a power purchase agreement or lease with a solar installer, the company owns the system. This is also called third-party ownership, and it’s a financing model allowed in only about half the states in the US. This is a list of states that permit this in 2021:
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- Rhode Island
Some states do not allow this because of regulatory obstacles preventing solar companies from selling electricity into the grid - the argument is that these companies have a widely distributed set of small solar power plants and are effectively acting as utilities. There may also be political opposition from entrenched interests who would prefer to not have distributed solar competing with existing power generation.
Pros and cons of leases and PPAs
The main advantage of going with a solar lease or PPA is that it can allow you to go solar when you aren’t able to obtain a traditional loan from a bank. These deals are usually zero money down, so this type of financing can allow people who otherwise couldn’t afford to own their own solar panels to participate in the green energy revolution.
The downside is that your lifetime financial benefit of a solar lease or PPA is probably less than if you financed or purchased the system outright. In addition, you need to consider whether you may sell your home before the term of agreement is complete, which may range from 15 to 25 years.
In any case, the program is administered by the solar installer, so be sure to read the fine print, as the specifics will vary among companies.
Questions to ask with a lease or PPA
The SEIA provides a thorough list of items that should be disclosed in a solar lease contract. We recommend printing it out and discussing it with your installer. In addition, here are some key questions to be sure to ask:
- What is the term of the agreement?
- What fees or downpayments are due at signing?
- Who receives the solar tax rebates for the system?
- What happens if I need to repair my roof?
- What happens if I sell my home? Is the agreement transferable?
- Who is responsible for maintenance, repair, and monitoring?
- What happens if the system generates less power than planned?
- With a lease: How much does my lease payment increase over time?
- With a PPA: How much does my per-kWh rate increase over time?
- With a PPA: Is there a monthly fee? Does it increase over time?
- Is there an option to end the contract early? Is there a termination fee?
- Is there an option to purchase the system at the end of the term?
Lower financial payback
One really important note: If one of your primary goals with solar is to save money, then a lease or PPA should not be your first choice. The solar company providing the lease or PPA is trying to make a profit, and that profit reduces your financial benefit.
Consumer Reports has a report that we agree with: The Real Cost of Leasing vs. Buying Solar Panels.
Low-income solar programs
The first thing you should do is determine if you are eligible for any of the many programs that are available to help people with low to moderate incomes join the solar energy revolution. If you do qualify, you can access better rebates or even get free solar panels for your home.
Some programs are managed by local communities and non-profits, so this list may be incomplete. Be sure to check with your local municipality and utility company to see if there are additional programs available to you.
GRID Alternatives is a fantastic non-profit organization that helps bring zero-cost solar energy to low-income families and under-served communities. They also have a job training program that focuses on communities that are traditionally underrepresented in the solar industry, including women, people of color and those impacted by the criminal justice system. They currently do work in California, Colorado, and the Mid-Atlantic region.
City of Boulder
The City of Boulder Solar Grant program makes more than $100,000 available to help income and moderate income individuals and non-profits add solar to their homes and businesses. https://bouldercolorado.gov/solar/solar-rebate-and-solar-grant-programs
The Massachusetts Clean Energy Center administers the Mass Solar Loan program which can reduce the loan principal by 10-30% for qualifying residents of Massachusetts. https://www.masssolarloan.com/loan-support-incentives
NV Energy utility
The Solar Incentives program of NV Energy more than doubles the existing performance-based incentive for low-income customers. https://www.nvenergy.com/cleanenergy/renewable-energy-incentives/solargenerations-incentive
NY-Sun is a statewide solar incentive program for residents of New York state. Households earning less than 80 percent of the median income, through the Affordable Solar program, can get double the standard NY-Sun incentive for the installation of solar photovoltaic. In addition to the standard NY-Sun eligibility requirements, households must first perform some low-cost energy efficiency upgrades to qualify. https://www.nyserda.ny.gov/All-Programs/Programs/NY-Sun/Solar-for-Your-Home/Paying-for-Solar/Incentives-and-Financing
What is PACE financing?
Property Assessed Clean Energy is a program available in California, Missouri, and Florida that provides homeowners with 100% of the financing for a solar photovoltaic system. If the program is available to you, we recommend that you look further into it even if you weren’t intending to to use a loan to purchase your system, because the program provides a number of unique advantages.
First of all, the principal is paid back over a period of up to 20 years as an assessment on your property tax bill. One major advantage of this is that if you sell your home before the financing is repaid, the assessment will continue to be paid by the future property owner as part of the annual tax assessment. This is helpful if you’re not sure if you will stay in your home for the duration of the loan, as the balance will automatically transfer to the next homeowner. (Just be sure to disclose the PACE loan to the home buyer!) That said, if you want to prepay the loan before selling the home, you have that option as well.
Another detail is that the loan amount you qualify for with PACE depends on your home equity, and not your credit score. This has both pros and cons: on one hand, this is helpful for people with a lower credit score. On the other, it also means that it’s easier to get yourself into a situation where you have more debt than you can handle.
PACE financing is also non-recourse, which means that if you end up defaulting, the lender is able to recover their money from your collateral (your home, in this case) but is not able to go after your other assets if there is any remaining balance. One thing to keep in mind is that because non-recourse loans entail a little more risk to the lender versus recourse loans, they often end up costing more.
Finally, the interest paid on a PACE loan is tax-deductable, just like mortgage interest.
PACE is a program operated at the muncipal level. Visit the following link to learn more about PACE and to find out if this program is available in your area: PACENation.
HomeStyle Energy Mortgage by Fannie Mae
The HomeStyle mortgage is a program run by Fannie Mae, and it allows a homeowner to use up to 15% of the assessed property value of their home from either a new mortgage or a cash-out refinance toward energy saving improvements to their home, including the purchase of solar PV system.
This means that if your new mortgage is $100,000, and your home assessment is at least that much, you can use up to $15,000 of that mortgage toward energy improvements. Or, if you are refinancing a mortgage, you can use up to 15% of your assessed property value for energy improvements.
The benefit of the HomeStyle program is that you will often obtain more favorable terms than through other types of loans. This financing program is available through any Fannie Mae-approved lender.
That’s quite a lot of options to consider. If you are trying to understand how to make a decision about the best way for you to pay for solar panels, here’s a table that summarizes the pros and cons of each option:
|Financing option||Pros and cons|
|Paying cash|| Simplest option
You own the system
Can give you the highest financial return
Requires you to save all the money needed for the system
|Home equity loan or HELOC|| Does not require you to
build up significant
You own the system
Can give you the highest financial return
Getting a loan can be complicated
Requires you to have a good credit rating and enough equity in your home
|PPA or lease|| Can allow you to go
solar when you otherwise
Usually no upfront cost
You don’t own the system
Lower financial benefit
Can make a house sale difficult
|Solar incentives for low income households|| Can make solar
affordable for household that
Not available everywhere
Usually has a limited enrollment
|PACE financing|| You own the
Interest paid is tax-deductible
Loan amount doesn’t depend on your credit score
Only available in CA, MO, and FL
|HomeStyle Energy Mortgage|| Can get better terms
than a traditional
You own the system
Other pros same as a traditional loan
Only available through a Fannie Mae lender
Other cons same as a traditional loan
|Solar loan|| Easier loan
You own the system
Loan terms usually worse than a traditional loan
Inferior to other alternative lending options, such as the HomeStyle Energy Mortgage
- The Real Cost of Leasing vs. Buying Solar Panels (Consumer Reports)
- HomeStyle® Energy FAQ from Fannie Mae
- IRS says PACE interest falls under mortgage deductibility guidelines
- Fannie Mae selling guide for properties with a PACE loan
- Solar Energy Industries Association consumer guide to solar power