Home solar is a means to long-term energy savings for a vast majority of US homeowners, but exactly how much you save depends on whether you lease or buy solar panels.
We''ll be the first to admit that solar financing isn''t exactly the sexiest topic in the world and it can feel a bit overwhelming at first. However, the way you finance your solar panels can make the difference of tens of thousands in energy savings over the life of the system.
Let''s dive in with the difference between buying and leasing solar panels.
There are three major differences between buying and leasing solar panels:
If you purchase a solar system, either with cash or a loan, you own the system and receive 100% of the benefits that come with it. That includes the 30% federal solar tax credit and any other state, local, or installer incentives.
When you sell your home, the solar system is treated as an attached appliance like a furnace or air conditioner — it''s sold as part of the home. In fact, multiple studies have shown that homes with solar systems sell faster and for more money.
If you lease a solar system, the company you lease from owns the system. You are essentially renting the system from a solar company, similar to leasing a car or renting an apartment. Since you don''t own the system, you don''t benefit from any of the incentives. The company that owns the system does.
And things can get sticky if you decide to move during your lease. The system adds no value since it''s technically not part of the home, and you''re left paying off the remainder of the lease yourself or finding a homebuyer that agrees to take it on.
Is it possible to sell a home with a leased solar system? Absolutely! However, it can complicate and drag-out the selling process.
Much like a house or car, home solar systems can be purchased with cash or a loan. Here are the basics of buying a solar panel system.
Paying cash is the simplest way to buy a solar system and presents the greatest opportunity for energy savings. That’s because you are avoiding the interest payments on a loan and the escalating payments on a lease. And, some installers offer a discount for paying in cash, which increases your overall savings.
Buying a solar system with cash typically consists of four payments. The exact benchmarks and payment amounts will vary from installer to installer.
It''s important to note that the 30% federal solar tax credit kicks in after you''ve paid for the system. That means you pay the full contract price in cash and end up with the lower net cost after you claim your tax credit.
Many homeowners use loans to purchase solar panels because it requires less cash upfront and still provides substantial long-term energy savings.
Solar loans typically have the following qualifications:
With zero-down payment options and loan terms as long as 20 years, solar loans can be quite flexible. However, most solar loans operate within two basic frameworks: Combo loans and re-amortizing loans.
Combo loans are the most common loan for homeowners that are confident they have the tax liability to claim the full 30% solar tax credit in the first year after installation. Consult a licensed tax professional with questions regarding your tax liability.
As the name suggests, a combo loan is technically two loans:
The advantage of a combo loan is that the 30% tax credit is essentially built into the original loan balance. So instead of taking out a loan for the gross system cost $25,000, you''d take out a loan for the net cost of $17,500. This makes for lower monthly payments right off the bat.
In most cases, the borrower has 18 months to pay off the bridge loan, which is typically more than enough time to claim and collect the solar tax credit. If the bridge loan isn''t paid off in time, it''s rolled into the primary loan and raises the monthly payments.
Here''s an example of a 20-year combo loan with a contract price of $25,000 and a net price of $17,500 after the 30% solar tax credit.
Figures for example use only. This is not an offer to lend.
Re-amortizing loans work similarly to a home loan with a free one-time refinance. This loan structure is commonly used by homeowners that don''t expect to have the tax liability to quickly collect the 30% solar tax credit. Consult a licensed tax professional with questions regarding your tax liability.
In a re-amortizing loan, the loan balance is based on the contract price of the system. This makes for higher payments upfront than a combo loan. However, as the name suggests, borrowers can re-amortize by making a lump sum payment to lower the monthly loan payments.
One way to think of it is delaying a down payment until you receive your solar tax credit. However, the re-amortization payment can come from anywhere – inheritance, holiday bonus, selling baseball cards on eBay.
Here''s an example of a 20-year re-amortizing loan with a contract price of $25,000 and a re-amortization with the value of the 30% tax credit after year two.
It''s important to note that the lender has nothing to do with claiming the solar tax credit. That''s between you, the IRS, and a licensed tax professional.
Solar panels can also be leased, similar to renting an apartment or leasing a car. There are two basic types of solar lease agreements: Fixed monthly leases and Power Purchase Agreements (PPAs).
Fixed monthly solar leases are pretty straightforward. The solar company installs a system on your roof, and instead of paying your utility bill, you make a lower monthly lease payment on the solar system.
20-year solar lease with a 3% annual escalator.
Solar leases offer immediate energy savings. However, due to the escalator, they end up being more expensive in the long run than purchasing a solar system with cash or a loan. We’ll expand on that later in the article.
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