Financing solar panels 101

Solar panel systems have high upfront costs, but incentives help offset the total price.

Several components make up the cost, including hard and soft costs.

Financing options are available to fit any budget, including a cash purchase, solar loans, lease, or power purchase agreement.

Installing solar panels is a great way to lower energy bills and power your home with green energy.

Adding solar power to your home can have many financial and environmental benefits. Solar panels can reduce or eliminate your electric bill, and the investment can also increase property value.

Unfortunately, solar equipment isn't cheap. According to data from the Lawrence Berkeley National Laboratory, the average cost of a solar panel system in the US is $31,558. That price tag might feel overwhelming, but the government will reduce your tax bill if you put a new system on your roof. The Inflation Reduction Act includes a 30 percent tax credit that applies to all eligible solar expenses. So, if you pay $30,000 to install a new system, you’ll qualify for a $9,000 tax credit.

No matter how much you get to wipe away from your tax bill, the upfront cost can still be daunting. The good news is there are several financing options to help make solar panels more affordable.

Solar panel costs will vary depending on the type of solar panels you choose (either monocrystalline, polycrystalline or thin-film). The number of panels you’ll need will depend on their efficiency, the size of your home and how much electricity you use. However, an average-sized house will usually require 15 to 25 solar panels to cover its electricity bills fully, according to SaveOnEnergy. (SaveOnEnergy is also owned by Bankrate's parent company, Red Ventures.)

Solar panels come in three basic types.

Monocrystalline solar panels are the most efficient of the three. They’re made from a single sheet of silicon, which is then divided into square-shaped solar cells. For each monocrystalline panel, you can expect to pay between $1 to $1.50 per watt (not including labor or installation expenses).

Polycrystalline solar panels are created from multiple silicon crystals (rather than a single sheet). As a result, they’re less efficient but more affordable. They cost between $0.70 and $1 per watt.

Thin-film solar panels are very versatile and have a high tolerance to heat. However, they are the least efficient, so you’ll need more of them (and, therefore, more space) to power your home. As a result, they’re used mainly in commercial or industrial settings. You’ll pay around $1 to $1.50 per watt for thin-film panels.

In addition to the hard costs, like the equipment, there are also several other costs associated with a residential solar system, known as soft costs. Understanding the difference between the two is important to understand your total cost.

Soft costs: Permits, inspection, financing, installation labor, supply chain, sales and marketing, company overhead

Hard costs: Solar panels, inverters, solar batteries, conduit, electrical panels and racking equipment

The following table includes the average system size and price per watt for the top five solar-generating US states, based on data from Find Energy.

State

System size

Price per watt

Total cost

California

5 kW

$3.93

$19,659

Texas

9 kW

$3.77

$33,902

Florida

9 kW

$3.70

$33,318

Arizona

8 kW

$3.50

$27,980

North Carolina

9 kW

$3.76

$33,841

You may get sticker shock when you see that it can cost tens of thousands of dollars to install solar power at your home. But it may still make financial sense because of the potential long-term savings. Your investment could pay off by significantly reducing or even eliminating your power grid usage.

According to the most recent data released by the Energy Information Administration, the state with the highest electricity bill is $244.70 in Connecticut, while the lowest is $83.55 in Utah.

The total average for the entire United States worked out to $141.41, which is about $50,908 over 30 years without factoring in rising rates, which increases the total cost. Depending on where you live and the tax incentives available, your total electricity savings could exceed the cost of your solar panel installation as long as you stay in the home long enough.

Using the national averages for system size, price, and electricity bill, here is an example of how much you could save on energy bills with solar.

System size: 8.6 kW

Total cost: $31,558

Monthly electricity bill: $141.41

Solar tax credit savings: $9,467

Payback period: 13 years

20-year savings: $11,848

Your home's location and energy consumption will ultimately determine what solar panels might cost you. You can get a cost and savings estimate by answering a few questions. After entering your address, monthly bill, and a few other questions, you’ll get results about solar panel costs and savings predictions for your home. It will also break down the environmental impact your installation could have.

In addition to looking at the savings that can add up in the big picture, be sure to consider the new tax credits included in the Inflation Reduction Act. For example, if your 30 percent credit works out to be $9,000, and you owe $7,000 in taxes next year, your federal tax liability will shrink to zero — and you’ll get to roll over that remaining $2,000 credit to the next year.

If you don't have the cash on hand to cover the total cost of going solar, consider these solar panel finance options.

By and large, the best type of solar panel financing is probably a personal loan. A personal solar panel loan will come with fixed interest rates and fixed monthly payments that never change during the life of the loan. Some home improvement loans have higher limits or longer terms to make it easier to pay for more expensive options.

Personal loans typically offer faster access to cash — sometimes in as little as a day or two — and many come with no origination fees. Also, personal loans are unsecured, so you don't have to put your home up as collateral or have a ton of home equity to qualify.

To qualify for the lowest rates, you’ll need good or excellent credit. If you don't have the best credit, you may get stuck with sky-high interest rates that make financing solar panels expensive.

Financing a solar panel purchase with a personal loan may be a good option if you need the loan proceeds quickly. It also makes sense if you have solid credit scores and will likely qualify for the most competitive interest rates.

There are also two types of mortgage loans — the FHA 203(k) loan and the Fannie Mae HomeStyle Renovation loan — that can help you simultaneously finance the purchase of a home and the installation of solar panels, as well as other renovations or upgrades.

Because the Fannie Mae HomeStyle Renovation loan allows as much as a 97 percent loan to value ratio, it's easier to qualify for than some other loans. Also, you can use either of these programs to refinance your existing mortgage and pay for your solar upgrades, too.

Compared to alternatives like personal loans, and home equity loans/HELOCs, the FHA 203(k) loan may have higher interest rates. The Fannie Mae HomeStyle Renovation loan rates tend to be lower than the competition. Still, often there's more red tape involved in the application, and remodeling work must be completed within 12 months of getting the money. Fees and closing costs are usually higher as well.

The FHA and Fannie Mae loans may be the way to go if you’re purchasing a home and wish to have solar panels installed simultaneously. They can also be smart choices if you aren't eligible for personal loans with reasonable rates.

If you have a lot of equity in your home and prefer to borrow against it, you can also consider a home equity loan or a home equity line of credit (HELOC). Home equity loans work like personal loans, as they have fixed interest rates, fixed repayment timelines and consistent monthly payments.

HELOCs, on the other hand, give you a line of credit you can borrow against like a credit card. With HELOCs, you’ll typically have a variable interest rate, which means your payment could go up or down as your account balance and interest rate fluctuate.

If you can use your home equity and have good or great credit, home equity loans and HELOCs will usually come with low interest rates and fair terms. Another perk is that you may be able to deduct the interest you pay on them and save money on your taxes.

You can usually only borrow up to 85 percent of your home's value across a first mortgage and second loan. In addition, home equity loans and HELOCs come with an application process that is more involved than the one for personal loans.

Home equity loans and HELOCs are a good choice if you have sufficient equity in your home and are determined that solar panels are likely to add value to it. These financing options are also worth considering if you don't qualify for a personal loan with a good rate because of your credit.

For solar buyers who want to avoid upfront costs and not have the responsibility for solar panel maintenance, a power purchase agreement (PPA) or solar lease may be a good fit. Both options can lead to lower energy costs, but the main difference is what you pay for in your monthly bill. In a PPA, you pay a specific price per kilowatt-hour (kWh) of solar energy generated, while in a solar lease, you pay a fixed monthly rate.

Both options have low upfront costs and lead to energy bill savings, plus you will power your home with clean energy instead of electricity from the grid. The solar company you have an agreement with is responsible for any needed maintenance or repairs to your solar system. If something works improperly, it is not up to you to fix it.

Solar lease and PPA contracts extend 25 to 30 years. If you plan to move homes, you must find someone willing to take over your contract. If they won't, you may have to pay a hefty cancellation fee. Also, rates may increase over time, so review your contract for any annual rate increase information. Solar leases and PPAs do not qualify for incentives, like the federal solar tax credit or net metering. Over time your savings will be lower than if you purchase a solar panel system with cash or a loan.

Solar PPAs or leases are best for those with financial restrictions but still want to power their home with solar energy and reduce their carbon footprint.

Solar panel costs can add up quickly. Fortunately, there are some tax incentives available to help you offset the costs.

One of the best benefits is the federal Inflation Reduction Act's 30 percent tax credit on solar installations, available for homeowners who purchase and install solar panels on their primary or secondary residence in the United States. The credit runs through 2032 in an effort to continue to spur the solar shift. In 2033, the credit will drop to 26 percent, and in 2034, it will decrease to 22 percent before phasing out in 2035.

Depending on where you live, you may also be eligible for state-sponsored tax incentives. For example, some states allow you to exchange your surplus solar power for credits on your energy bill through a process called net metering. In other states, solar panels are exempt from sales tax.

Solar energy is quickly growing in popularity, with some states even requiring that new homes come with solar panels. Solar offers reduced utility costs and the environmental upshot of generating renewable energy, but do your homework before committing to such a large project. You may even consider talking to people who have already installed solar panels to get their reviews of the systems they selected, or any valuable insights or recommendations.