Florida

What Is A Solar Loan? Think about that: $0 Every Month for your Electricity Bill

Solar energy is a clean, inexpensive, renewable power source that is harnessable nearly everywhere in the world. You will likely be able to benefit from solar energy, whether by installing solar panels on your property.

There are many people interested in solar power, and it makes good financial sense, too. If you live in the right area of the country and have a large enough home solar array, you can completely eliminate your electric bill.

Think about that: $0 every month for your electricity bill. WOW that will amazing, awesome. fascinating. incredible. marvelous

Have you ever taken out a loan for a home renovation project?

Solar panel loans are similar to home improvement loans, which have been used for decades to undertake projects like building a deck, upgrading an HVAC system, or adding a new bathroom. Like these other types of loans, when you borrow money from a lender to finance a solar panel system, you agree to pay it back (plus interest) in monthly installments over a fixed loan term.

Principal

Your principal is the initial size of your loan or the amount your lender gives you to pay for your solar system.

The principal is essentially the entire cost of your solar system if you purchased it outright.

As you continue to pay off your loan, your principal will be the amount that you still owe on the loan itself. You can likely make principal payments to lower the overall cost of your loan and cut down the amount of time you are paying it off.

Financing term

The financing term is often referred to as the "loan term," "loan length," or "loan contract," and is the length of your loan or the maximum length of time you'll be making payments. Your financing term will impact your interest rates, monthly payments, and your solar panels' return on investment (ROI).

For example, if your solar loan was $20,000 and you make an initial payment of $7,000, the total principal amount of your loan is now $13,000. You'll then only be charged interest on the $13,000 instead of the initial loan amount and pay less interest overall.

Interest rate and APR

People often confuse interest and annual percentage rates (APR). Depending on your lender and the type of loan, you may see percentages for an APR and interest rate in your loan documentation. If this is the case, the APR will usually be higher than the interest rate because it includes other loan fees.

APR is the annual cost of getting credit, expressed as a percentage.
Interest rate is the amount you pay to borrow from a lender in exchange for getting money to finance your solar panel system, expressed as a percentage.

Fees

You'll typically pay a solar loan fee whether an origination/dealer fee or a closing cost. The most common fee for solar loans is an origination or dealer fee, similar to an origination fee on a home loan. Fees can be laid out as a flat amount or a percentage of your total solar loan amount.

Origination/dealer fee: also known as an initiation fee, loan fee, or lender fee, solar lenders sometimes charge a premium to cover their lending risk. There's no industry standard dealer fee, so it'll vary depending on who is offering the loan.
Closing costs: occasionally, your solar loan may have closing costs listed, similar to an origination fee, in that they cover the associated risk the lender takes by closing on the loan.

Most solar loans are typically paid off in seven to nine years

This may be because a homeowner sells their home, refinances, or pays off the loan within that period. With this in mind, some homeowners choose a longer loan term to keep their monthly expenses low and pay off the loan when they have capital available.

It's also important to remember that you're eligible to receive the federal solar tax credit after you install your solar system, which will be 30 percent of your solar system's total cost. If you use your solar tax credit to pay off some of your loan's principal, you'll have even less to pay in the long run!

Some loans are structured to consider this and adjust your payment amounts based on when you are receiving your benefit from the tax credit. You may see changes in the monthly charge.

If not, you can use the lump sum from the tax credit to pay off a large portion of your loan's principal.

Solar panel loans have the same basic considerations as other types of loans. As you compare your solar loan options, you'll want to consider all the features of the loan, including:

Loan term: the maximum timeline you'll make payments on the loan
Interest rate or APR: the amount lenders charge for borrowing their money (a percentage of the initial loan amount)
Fees: any additional charges the lender assesses at the loan initiation.

Refinance a Solar Loan with One of Three Main Methods

HELOC (Home Equity Line Of Credit)

A HELOC or home equity loan is the best choice if you can’t reduce your mortgage rate by refinancing but have enough home equity. It’s also a sensible option if you aren’t looking to refinance your original mortgage due to a low mortgage rate or any other reason.

In essence, the HELOC loan is best for people who just want to pay off their solar loan because they’ll be borrowing less money. This makes home equity loans excellent for specific, targeted financing goals since the closing costs are generally lower than with other options.

And, because the loan amount is lower than what you’d get with a full refinancing, you’ll have less interest on your loan for as long as it's active (not repaid). An additional benefit of home equity loans is that certain lenders allow a higher CLTV (combined loan-to-value) ratio of up to 90%.

The Cash-Out Refinancing method is not possible if you lack the home equity it requires (cash-out usually uses 80% maximum LTV) which makes a home equity loan an excellent alternative choice, provided the lender applies the higher CLTV ratio.

Home equity lines of credit may be cheaper than your existing solar loan! HELOC loans generally have between 4% and 6.5% APR (Annual Percentage Rate), so it’s important to compare multiple lenders to find the best deal.

Cash-Out Refinancing Method

Compared to the HELOC loan, a Cash-Out Refinancing option will reduce your existing mortgage rate and the total monthly debt repayment amounts. This effect is amplified if your new rate (for the refinancing) is lower than the solar loan interest rate.

Here’s a quick example: If your current mortgage rate is 5.500%, with the solar loan interest rate being also 5.500%, and the Cash-Out Refinance rate is 4.500%, you’ll lower your monthly debt costs by refinancing.

The Cash-Out Refinancing method is also an excellent choice if you’re looking to simplify your finances since it allows two loans to be consolidated into one mortgage. You can even refinance into a fixed-rate mortgage from an ARM (Adjustable-rate mortgage) or an interest-only loan.

Fixed-rate mortgages are safer and more stable so it might be worthwhile to do so if your ARM isn’t good enough anymore.

Keep in mind that this method generally has stricter and tighter qualification needs and requirements, especially when it comes to credit scores. On top of that, they usually come with higher mortgage rates than traditional refinancing options.

Lastly, the Cash-Out Refinancing method’s mortgage gets categorized as a cash-out option, regardless of whether or not you receive any loan proceeds. The goal is of course to get some of that value of the solar installation back in the form of cash.

Now, as far as how you can qualify for a Cash-Out Refinance, here’s what you need to know: It is only a viable choice if you have sufficient home equity since you’ll have to pay off the existing mortgage and the solar loan. You also can’t exceed the lender’s LTV ratio.

The maximum LTV ratio is usually around 80% which means you’ll be able to borrow up to that value percentage of your property. Certain US states (for example, Texas) treat Cash-Out Refinances differently, so make sure to check with your local lenders.

Note: You may be rejected if your home equity isn’t high enough to pay off both the mortgage and the solar loan but the good news is that, since the solar system is already installed in your home, its property value will go up, potentially making it easier for you to qualify.

Home Renovation Mortgage

Home renovation mortgages are generally considered when one is buying a home, but they’re also great when it comes to solar loan refinancing and mortgage refinancing. Home renovation mortgages don’t include every sort of home improvement but adding a solar system is quite a large one.

They’re such a great choice for refinancing because they come with much higher LTV ratios than what you’d get with a Cash-Out Refinance. This might be the best alternative if your home equity is too low for a Cash-Out.

There are a couple of popular home renovation mortgage programs which might interest you and we’ve decided to cover three of them:

FHA 203(K) This mortgage allows a 97.75% LTV ratio for a refinance of your choice. This LTV ratio is higher than what’s used in a Cash-Out option; it also means your maximum mortgage amount will be higher. FHA 203(K) mortgages can only be received from approved lenders such as credit unions, mortgage brokers, and banks.
Home Style Renovation This mortgage gives you a 97% LTV ratio which enhances your refinancing capabilities. You’ll have to submit differing documentation and follow different guidelines depending on whether you plan to refinance a solar loan or invest in your property.
CHOICE Renovation Another home renovation mortgage with a high LTV ratio of 97%. You can get this program through traditional lenders as well.

Solar panels aren’t free, though. You can expect to spend about $20,000 for a home solar system, depending on the number of panels you need. Many homeowners are still able to break even in about seven to eight years despite the high cost.

But unless you have a spare $20,000 lying around, you may need to consider a solar loan to get started. Here’s what you need to know about solar financing.

Solar panels aren’t free, though. You can expect to spend about $20,000 for a home solar system, depending on the number of panels you need.

Many homeowners are still able to break even in about seven to eight years despite the high cost. But unless you have a spare $20,000 lying around, you may need to consider a solar loan to get started. Solar loan FAQ Q: Do solar loans require a down payment?

A: Most solar loans do not require a down payment but instead include a finance charge or dealer fee that gets wrapped into the principal of the loan.

Some lenders offer two separate loans at the time of sale: one for 70% of the system cost that is amortized over many years (10 to 20 is common) and another for 30% that is required to be repaid within 12 to 18 months. This second loan is based on the value of the federal solar tax credit, which can earn homeowners a tax credit of 30% of the cost to install the system when filing taxes for the year the system was placed into service.

Q: Is a solar loan considered a second mortgage?

A: A solar loan is not considered a second mortgage, but some lenders place a special lien on the solar installation called a UCC-1 filing (from the Uniform Commercial Code). This UCC-1 lien protects the lender’s interest in the solar property in case of default until the loan is paid in full and is a public record.

The UCC-1 filing can sometimes cause confusion with mortgage lenders, who can see the filing and might consider it a lien on the property if the homeowner seeks to refinance the mortgage or moves to sell the property. In this case, you can work with the lender to have them provide proof that they have no interest in the property other than the solar system.

Q: Can you pay off a solar loan early?

A: Nearly all solar loans come without a prepayment penalty and can be paid off at any time. Like other loans, you should contact your lender for a payoff quote. Some people have chosen to pay off solar loans as part of refinancing in order to roll the remaining cost of the loan into a new mortgage.

Q: What is the minimum credit score needed to qualify?

A: In general, a credit score of 580 is required for most kinds of solar loans. Some solar lenders advertise that they have no minimum credit score requirements, while others place limits on buyers’ credit scores or require a filing fee based on credit score. Buyers with better credit scores can receive better interest rates on certain solar loans.

Bottom line: are solar loans a good idea?

Loans can be a great way to pay for solar panels. If you can design a loan with a monthly payment less than or equal to the average monthly savings the solar installation will generate, you can essentially be cash flow positive from day one.

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