Solar panel financing: What to know in 2023

Complete freedom from electric bills — who wouldn’t want that? It’s easy to understand why homeowners are increasingly turning to solar panels, with residential solar installations up by 30% from 2022 to 2023 alone, according to a recent report from the National Renewable Energy Laboratory. 

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Thanks to technological advances, lower costs, and a hefty boost from the recent passage of the federal solar tax credit, outfitting your home with its own on-site renewable energy is more accessible now than ever. There’s still just one significant barrier to overcome for most people: the cost. 

Average cost of solar panels

The average home solar panel system cost between $17,430 and $23,870 in 2023 after accounting for the 30% federal solar tax credit, according to EnergySage. The cost of solar panels varies widely depending on many factors. Some of the largest ones include:

• State: Some states, like Florida, are simply located in sunnier areas than northern states like Alaska. States often set regulations governing the solar industry that can make it more or less beneficial for home solar systems.  
• Equipment: There are several types and brands of solar panels available that come with varying costs. Adding solar storage capacity to your home solar system can also increase the cost. 
• System size: The more solar panels installed, the more it will cost. Solar system sizes have been increasing over the years, from a nationwide average of 2.4 kW in 2000 to 7.2 kW in 2023, according to Berkely Lab’s Tracking the Sun report. Average system sizes range as high as 9 kW in some states, however.
• Your home: If your home is located in a dark, shady forest, you won’t receive as much benefit as someone living in an open field. Your roof space also dictates the maximum size of a roof-mounted solar system, and installation on a home with two or more stories can also add to the cost. 
• Solar panel installation company: Different companies charge different rates. It’s a good idea to shop around and get bids from multiple companies in the same way that you would shop around for the best financing option. 

Are solar panels worth it?

The average U.S homeowner will break even on the cost of solar panels in just 8.7 years, according to EnergySage. Over the course of 25 years, the average home solar panel system can save homeowners nearly $42,000. Solar panels can also boost your home value by an average of 4.1% nationwide, according to one 2019 Zillow study.

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There are less tangible benefits to solar panels as well. Many homeowners are drawn to the idea of energy independence, self-sufficiency, and not relying on a utility provider for electricity needs. Millions of homeowners appreciate solar panels as a way to transition to a more environmentally friendly energy source, divesting from harmful fossil fuels. 

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Given the range of factors that influence the cost of solar panels, it’s hard to predict whether it’ll be worth it for an individual homeowner without crunching some numbers. You can use a solar power calculator to get a rough idea of whether solar panels will be financially viable for your family. Solar panel installers can give you a more in-depth assessment of your costs versus expected return.  

Solar panel financing options

You’re in good company if you’re interested in taking the leap into outfitting your home with solar panels but you don’t have enough saved up to pay in cash. Luckily, there are many ways to lower the price with cost-effective financing options to pay for the remainder. 

Government and utility incentives

Most homeowners will qualify for one or more incentives to bring down the total cost of a new solar system. Federal, state, and local governments or your local utility provider generally offer these incentives. It’s best to see which options you qualify for first because this may affect the amount of solar financing you’ll need. 

Federal solar tax credit

One of the biggest boons to homeowners making the switch to solar is the Residential Clean Energy Credit, introduced in 2022 as a part of the Inflation Reduction Act along with a host of other green tax incentives. This non-refundable tax credit is worth up to 30% of the total cost to purchase and install solar panels on your home, less any subsidies, rebates, or other incentives that you receive. Other federal solar incentives also exist, but this is the largest one most people will qualify for.

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The solar tax credit is available for systems installed on your primary home between 2022 and 2032. If you work from home, your tax credit amount may be reduced if you use more than 20% of your home for business purposes. You’ll also need to be the actual owner of the solar panels — homeowners who lease solar panels are not eligible. 

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It’s important to understand that the tax credit doesn’t lower your cost right away. You’ll still need to pay for or finance the total cost of your home solar system upfront. You’ll claim the tax credit by filling out Form 5695 (“Residential Energy Credits”) when you file your tax return, using it to offset your tax bill. You can only use the credit to lower your tax bill down to $0; if you still have remaining credit after that, you can carry it forward into future years to lower your tax bill.  

State and local incentives

There are dozens, if not hundreds, of individual programs available at a state and local level that can help you lower the cost of solar panels or finance them at more affordable rates than traditional solar financing methods. Some programs are limited to people living on a fixed income, while other options are more broadly available. You can find the exact options available where you live by plugging your ZIP code into the Database of State Incentives for Renewables & Efficiency. 

Home equity financing

Most financial advisors recommend limiting your use of home equity financing to projects that increase your home’s value, and solar panels certainly fit that bill for most homeowners. Home equity financing uses your home as collateral, which means your lender can foreclose on your home if you default on the loan. 

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It can also take several weeks, and you may be charged high closing costs with these financing options because your lender needs to verify your real estate details in addition to your finances. Many lenders only work with people who have good credit and at least 20% equity in their home.  

Home equity line of credit (HELOC)

A HELOC is split into two phases. You’ll be able to borrow against your line of credit as needed during the initial “draw phase” lasting five to 15 years, making interest-only minimum payments. You can pay more at any time to refresh your available credit. You’ll repay the full balance of your HELOC in either a single large balloon payment, or over the course of another five to 15-year loan during the final “repayment phase.” 

Pros

• Interest may be tax-deductible
• Flexible access to funds over time
• Interest-only minimum payments during draw phase

Cons

• May require good credit
• Requires monthly payment
• More expensive than a home equity loan
• Requires at least 20% equity in your home
• Variable interest rates and monthly payments
• Monthly payments increase during repayment period  

Home equity loan

A home equity loan is a simpler option than a HELOC. If approved, you’ll receive the loan funds in one lump sum, which may better align with paying contractors to install your solar panels. You’ll then begin repaying the loan immediately.  

Pros

• Interest may be tax-deductible
• Lower interest rate than HELOCs
• Fixed interest rates and monthly payments

Cons

• May require good credit
• Requires monthly payment
• Requires at least 20% equity in your home

Home Equity Investment (HEI)

An HEI offers lump-sum funding similar to a home equity loan, but it’s tied to the future appreciation in your home’s value rather than your current home equity. An HEI typically must be repaid with a single balloon payment at the end of a 30-year term length, or when you sell your home or refinance your mortgage. 

Pros

• No income required
• No monthly payments required
• Credit requirements easier to meet
• Smaller repayment for small growth in home value

Cons

• Balloon payment required
• Requires more home equity 
• Larger repayment for large growth in home value

Government renovation loans

Many government agencies and government-sponsored entities offer affordable solar financing for qualifying homeowners through specific programs. These may be available as separate home improvement loans or may take the form of cash-out refinance loans that replace your current mortgage with a larger one, with the extra proceeds being used to pay for your solar panels. 

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Most of these programs are offered through independent lenders who adhere to the guidelines set out by each department. The qualifications, requirements, pros, and cons can vary tremendously among programs, so it’s best to reach out to an experienced mortgage professional for more guidance on the following loan types:

• FHA 203(K) loan
• VA Supplemental Loan
• VA Energy-Efficient Mortgage
• Freddie Mac GreenCHOICE Mortgage
• USDA Energy Efficiency Loan Program
• Fannie Mae HomeStyle Renovation Loan

PACE programs

Property Assessed Clean Energy (PACE) programs are a relatively new type of funding option administered by municipal governments within certain states. They’re not technically loans, but they do offer low-cost funding that you repay through your property tax payments over the course of five to 20 years. If you’re still paying off a mortgage, your lender will automatically split this up and add it to your monthly mortgage payment. 

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PACE financing is a more accessible type of funding for many people, but most large mortgage providers ban them because PACE liens supersede a mortgage lien. This can make it tougher to sell your home because it limits who can buy it and also because the PACE lien stays with the property, meaning buyers will need to continue paying the debt too.

Pros

• Low interest rates
• No monthly payments
• No upfront cash needed
• Easier qualification requirements

Cons

• Can be tougher to sell home
• Can lose home if you default
• Repaid through higher property tax bill
• Bad reputation from unscrupulous lenders
• Only available in California, Florida, and Missouri
• Not available for homes with VA, FHA, Fannie Mae, and Freddie Mac mortgages

Personal loans

Many homeowners prefer to use personal loans to pay for solar financing because it’s a quicker and easier type of loan to get, although it may be more expensive than equity-based financing. Most personal loans are unsecured, although some lenders allow you to use bank account balances, vehicles, jewelry, or other items of value to secure your loan in exchange for easier approval and/or lower interest rates. 

Pros

• Fixed rates
• Quicker funding speed
• Can use non-home collateral
• No home equity requirements
• Less foreclosure risk if you default

Cons

• Higher interest rates
• May charge origination fees
• Good or excellent credit needed for best rates

Contractor financing

Most solar companies offer in-house financing or work with partner lenders to help customers afford new solar installations. They may offer other options already covered on this list, such as PACE loans, or they may have other financing offers that are structured differently. 

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Some companies, for example, split solar financing up into two parts: a short term bridge loan for the tax credit, with a long term secured loan for the remainder. A homeowner would then use their tax credit to pay off their bridge loan when they file their tax return — but this can be a risky proposition, especially if you can’t use the full tax credit in the same year and must carry it forward for future returns. 

Pros

• Easier qualifications
• Simplifies purchase for solar panel system
• Low rates or special financing offers often available

Cons

• Options may vary
• Tax credit bridge loans can be risky

Solar leases and power purchase agreements (PPAs)

Solar leases and PPAs used to be more popular, with 60% of systems falling under these arrangements in 2012 versus just 24% in 2021. A solar lease allows you to rent the solar panel system from a solar company, which retains ownership and installs it on your roof. A PPA works similarly, except you pay for the amount of electricity generated from the solar system on your roof rather than paying to an electrical utility provider. 

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These arrangements often come with minimum term requirements which may require you to pay early lease-breaking fees if you sell your home, unless you can convince the buyer to take over the lease for you.

Pros

• Cheaper upfront costs
• No ongoing maintenance
• Easier qualification requirements

Cons

• No tax benefits
• No property value increase
• Long commitment required
• Not as much financial return
• Can be tougher to sell home 
• No ownership of solar panel system

Final thoughts

Solar panel financing can open the doorway to lower electric bills, but don’t forget about home energy efficiency improvements too. Getting a home energy audit done can help you identify ways to lower your electricity needs so that you don’t need to purchase and finance as large of a solar panel system. That way, you can spend less while enjoying your energy-efficient green home for years to come, leaving more money left over to fund other things that your family enjoys.