How to get a loan for solar installation
Solar loan basics
- Banks, credit unions, nonprofits and product manufacturers offer solar loans.
- Solar loans can be unsecured personal loans or secured by the property.
- PACE loans are another specialized form of financing for energy improvements.
- To qualify, good credit and sufficient home equity are required.
In an effort to go green and save on energy costs, more homeowners today are installing solar panels. Unfortunately, it isn’t cheap.
The initial cost for solar upgrades can tally several thousand dollars, and most Americans can’t afford to pay cash upfront. The good news is that many lenders, including traditional banks and credit unions, offer solar loans. Manufacturers also commonly offer financing programs.
In several states, nonprofit organizations have sprouted up to facilitate projects. These companies will often do energy audits on the house and offer financing programs for solar projects.
Secured vs. unsecured solar loans
Solar loans can be secured by the property or unsecured. There are advantages to both. With an unsecured loan, you won’t risk the loss of your property if you run into financial problems and default on the loan. Lenders typically consider a loan secured by property less risky, however, and will give you a lower interest rate.
During the Obama administration, the Federal Housing Administration (FHA) offered several options for financing solar and energy upgrades. For borrowers with good credit, FHA had three different types of home-improvement loans, ranging from unsecured loans up to $7,500 to secured loans up to amounts that nearly cover reconstruction of the house.
FHA works with a network of approved lenders. The borrower applies for the loan through one of these lenders, and FHA guarantees it, which enables the lenders to offer the financing at a reasonable cost. One caveat is that government-loan programs could be changed under the Trump administration. In recent years, FHA has provided a list of its approved lenders on its website.
Consumers also can check with the U.S. Department of Energy, which publishes a map on its website listing what government-backed home energy-efficiency loans are available in each state.
Property Assessed Clean Energy Program loans, or PACE loans, are another specialized form of financing for energy improvements.
PACE loans are different animal. As of early 2017, the loans were still only available in a handful of states, most notably California.
Unlike a standard loan, a PACE loan becomes part of a tax assessment and appears on the homeowner’s tax bill. PACE loans carry terms of up 30 years, and you will typically make loan payments semi-annually as part of your property-tax bill until the loan debt rolls off the tax assessment. PACE loans are secured by a lien on the property. So, if the property owner sells the property, the new owner would assume the loan.
PACE financing is still controversial, however, and among its critics are mortgage trade organizations, which claim there are better, less-expensive financing options.
HELOCs and home equity loans
Another way to finance solar power and energy improvements is through traditional home equity lines of credit (HELOCs) or home equity loans. With HELOCs, a lender will extend a credit line to the borrower based on the borrower’s credit history and estimated home equity. HELOCs work like a credit card, and the borrower only pays interest on the amount that is drawn.
By contrast, home equity loans are traditional second mortgages, which are lent as a lump sum. The borrower starts paying back the loan on a fixed monthly schedule with interest almost immediately.
The bottom line is that there are many ways to finance solar projects. As with most second loans or other forms of financing, the borrower will typically need to have built up some equity in the home and have a good credit history in order to qualify.