Homeowner’s Basics of Solar Energy Financing for Residential Real Estate

To avoid rising energy costs and benefit from increased renewable energy incentives and tax breaks, more homeowners could consider a solar home system. Last year, the growth of residential solar power in the United States exploded. Even though overall growth in solar installations, including commercial and large-scale projects, declined year-over-year, residential solar projects increased 40%, to just under six gigawatts, according to the Solar Energy Industries Association. This growth has reached a record 700,000 US homeowners installing solar power in 2022.

There are a host of complex issues in the solar market, including controversial policies. Battles remain over foreign sourcing of solar energy components and tariffs on imports from China – President Biden recently vetoed a bill that would have reimposed tariffs and likely raised costs while along the solar supply chain. Net metering, a primary way homeowners can be reimbursed by the grid for generating their own power, was hit hard in California – the nation’s largest solar market – last year, and that is expected to curb growth. overall residential projects this year. And lending conditions across the credit market are tighter today due to higher interest rates from the Federal Reserve, which is pushing up lending rates for solar projects.

Financing may be necessary or at least valuable for most homeowners interested in upgrading their home energy with solar power. The national average for a 10-kilowatt solar panel installation in 2023 is about $20,000 after factoring in a 30% federal solar tax credit, according to EnergySage, a marketplace that connects consumers to energy companies. Loans have exploded as a way to finance solar power, and even as low interest rate and in some cases no interest rate offers disappear, higher utility bills continue to make loan rates reasonable. . According to energy consultancy Wood Mackenzie, the loan segment’s record share of the residential solar market reached around 70% of projects in 2022. It will not repeat itself in 2023, but will remain a large part of the solar market.

Starting with the basics is the best way for homeowners to start thinking about solar energy financial decisions. Here are some key things to consider before making the decision to go ahead with a residential project.

Do your research on state-by-state solar costs

“Before you investigate how you’re going to pay, it’s easy to figure out what you might want to buy and what it might cost,” said Joel Rosenberg, a member of Rewiring America’s special projects team, a non-profit organization focused on electrifying homes, businesses and communities.

He recommends using EnergySage to find competing solar quotes. This will give owners a better idea — beyond national averages — based on real-world factors like system size. It’s important to understand this before you start thinking about how to pay, he said.

Find local energy financing programs

Once homeowners are ready to explore financing options further, their state’s energy office and a local electric utility can be good starting points, as both can offer solar financing programs. .

“They may not be directly involved, but often they can point out things that might be worth looking into,” said Madeline Fleisher, an Ohio-based environmental and energy attorney. who runs a clean energy website.

Ohio, for example, has a state program that offers a reduced rate on a solar loan from certain lenders.

Get solar loan quotes from multiple lenders

Consumers should seek quotes from three to five sources, making sure to pay close attention to terms and conditions, said EnergySage CEO Vikram Aggarwal.

Potential lenders may include a homeowner’s local bank, a credit union, a national bank, or a specialized institution known as a green bank that focuses on lending for environmentally friendly projects.

Green banks may have even more robust offerings, Fleisher said. Using a simple Google search for “green bank” and your state may yield options. To find potential lenders, owners can also consult broader industry sources such as the Green Bank Network or the Coalition for Green Capital.

Carefully consider offers from solar installation companies

Solar installers, such as sunrun And Sunnovaalso offer loans.

Most installers offer loans with terms of 15, 20 or 25 years, while banks may offer short-term loans at lower interest rates and fees, Aggarwal said. Interest rates can vary widely depending on factors such as the loan amount, term and the borrower’s credit strength. Typical loan amounts are $1,000 to $100,000, and annual percentage rates for people with excellent credit can range from around 6% to around 36%, according to recent analysis by Nerdwallet.

“Installers are good at installing solar, but they may not be financial or banking experts,” said Jason MacDuff, president of greenpenny, a virtual, carbon-neutral bank focused on financing solar energy. sustainable projects.

He said any homeowner considering a loan through an installer should make sure to speak to the financier directly. Owners should seek to fully understand the financial arrangement they are entering into, he said. For example, will it be a fixed or variable rate? What are the initial financing costs? And what is the estimated monthly payment?

It’s also worth noting that installers don’t always mention fees, so be sure to ask about the cost of installation if you’re paying cash versus financing, Aggarwal said. Prepayment charges aren’t likely, but it’s worth asking and confirming in the loan documentation, just to be sure, he said.

Review solar debt fees, terms and conditions

Consumers should always ask about the fees associated with the loans offered, in addition to the interest rate, since fees can run into the thousands of dollars.

Owners should also be aware of other terms, conditions and options that may be available. For example, some loans allow the borrower to amortize once to reduce the amount. For example, if a homeowner takes out a $10,000 loan and then receives a $3,000 tax credit, the money can be used to pay the lender and bring the loan down to $7,000. Generally, this option, when available, can be used once in the first 12 to 18 months of the loan, Aggarwal said.

Home equity loans and HELOCs could be a good option for homeowners who have built up enough equity in their home. These options could also work well for homeowners whose credit doesn’t allow them to qualify for a personal loan at a great rate, according to Bankrate.

Pay attention to loan risks that can lead to foreclosure

The last thing any homeowner should do is let a green finance loan lead to foreclosure. This has been a concern for the Federal Trade Commission and the government’s consumer watchdog, the Consumer Financial Protection Bureau. Property Assessed Clean Energy (PACE) loans, secured by a property tax lien on the borrower’s home, have been used over the past decade to finance renewable energy home improvements like solar power and were particularly popular several years ago.

The CFPB has expressed concern about lenders failing to perform, and those loans leading borrowers to fall behind on mortgage payments and deteriorating creditworthiness. A new CFPB proposal aims to protect homeowners from “unscrupulous companies” offering “unaffordable loans with exaggerated promises of energy bill savings”, according to a recent statement by CFPB director Rohit Chopra.

The solar finance market is dominated by a handful of players

While there are many lending options in the residential solar market, data shows that total lending volumes are dominated by five players who funded 71% of the entire residential market in 2022, according to Wood Mackenzie. This was similar to the 2021 lending market. GoodLeap (26% of the residential solar market) was #1 overall.

Sunrun and Sunnova together captured 79% of the third-party solar home market. This brings up another key decision for owners: should they finance and own the system themselves or lease the rights to their solar power generation?

Solar leasing is about to be more popular, but has drawbacks

Rental options exist and may be attractive to some homeowners as a way to avoid upfront equipment and installation costs. Another advantage is that the owner is not responsible for maintenance. Renting to landlords is expected to become more popular this year, according to Wood Mackenzie, due to additional credits rental companies can receive under the Inflation Reduction Act. These “adders” beyond the basic 30% tax credit make the economy more attractive to companies that rent solar systems from homeowners.

But there are downsides for homeowners.

Renting is generally more expensive for landlords and they will not be eligible for the 30% tax credit, Aggarwal said. Renting can also present several challenges when homeowners decide to sell their home, so it’s important to weigh the pros and cons carefully, Aggarwal added.

If considering this route, landlords should make sure they understand the details of the rental process, MacDuff said. For example, they need to know how the lease payments compare to their existing utility payment and what the repair process will be if problems arise.

Solar prices continue to fall, so rushing is not the right decision

The tax credit that was extended and increased as a result of the Cut Inflation Act makes the cost of solar installation more palatable to consumers, Rosenberg said. But if it’s still out of reach financially, even with a loan, check back every once in a while as prices continue to drop and homeowners have 10 years to qualify for the IRA incentive.

“You can get a quote in 2023 and a quote in 2026 and it could be two-thirds of the cost and you can still get the tax credit,” he said.