Can You Refinance a Solar Loan? And Should You?

Solar energy systems represent a substantial investment for homeowners, often requiring financing to cover upfront costs. These systems typically involve loans spanning several years. Like many financial commitments, solar loans are often eligible for refinancing. This process involves replacing an existing solar loan with a new one, potentially offering more favorable terms or a different repayment structure. Refinancing can align the loan with a homeowner’s current financial situation or take advantage of improved market conditions.

Understanding Refinancing Options for Solar Loans

Refinancing a solar loan involves several distinct approaches. One common method is refinancing with a new, dedicated solar loan. This new loan might come from the same lender or a different financial institution, often to secure a lower interest rate or an adjusted loan term. Some lenders offer solar loan refinances with no origination or prepayment fees and competitive fixed rates.

Another option involves consolidating the solar loan into a home equity loan or a Home Equity Line of Credit (HELOC). Home equity loans provide a lump sum, while HELOCs offer a revolving line of credit. This approach can be attractive as home-secured options often provide more favorable interest rates compared to unsecured loans, leveraging the home’s value as collateral. Home equity loans or HELOCs allow homeowners to borrow against their home’s equity, potentially up to 80% to 90% of their combined loan-to-value ratio.

A third avenue is to include the solar loan balance in a cash-out refinance of a primary mortgage. This involves replacing the existing mortgage with a new, larger mortgage that encompasses the solar loan, with the difference paid out in cash. This strategy can simplify payments by consolidating multiple debts into a single mortgage, potentially at a lower interest rate.

Personal loans represent a less common, but sometimes viable, option for refinancing smaller solar loan balances. These loans are typically unsecured, meaning they do not require collateral. Consequently, personal loans often come with higher interest rates compared to secured options like home equity loans, and usually have shorter repayment terms. This option may be considered when a homeowner lacks sufficient home equity or prefers not to use their home as collateral.

Eligibility and Required Documentation

Refinancing a solar loan requires meeting eligibility criteria and providing documentation to lenders. A strong credit score is a primary factor lenders evaluate, as it indicates a borrower’s creditworthiness. While some solar loans may accept credit scores as low as 580, home equity loans and mortgage refinances typically require a minimum FICO score of 620 or higher, with better terms available for scores of 680 or above. Lenders also assess the borrower’s debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. Most lenders prefer a DTI ratio of 43% or lower, though some may accept up to 50% depending on other financial strengths.

For secured refinancing options like home equity loans or cash-out refinances, the loan-to-value (LTV) ratio is a key metric. This ratio compares the amount owed on the property to its market value. Lenders typically require a maximum LTV ratio of 80% for conventional cash-out refinances, meaning borrowers must retain at least 20% equity in their home. A consistent payment history on the existing solar loan and other debts demonstrates financial responsibility and improves eligibility.

Lenders require various documents to verify application information.

Required Documents

Personal identification, such as a driver’s license and Social Security number.
Proof of income, including recent pay stubs, W-2 forms from the past two years, and federal tax returns for the previous two years.
For self-employed individuals, signed copies of business tax returns and year-to-date profit and loss statements.
Information regarding the existing solar loan, including recent loan statements, the original loan agreement, and a precise payoff amount.
Details on any prepayment penalties or fees that might apply when closing the original loan.
If the refinance involves home equity, property information such as the property deed, a recent appraisal or property tax assessment, and homeowners insurance details.
Bank statements for the most recent two months for all accounts listed on the application.

The Refinancing Application Process

Once a homeowner has evaluated refinancing options, assessed eligibility, and gathered documentation, they can begin the application process. The initial step involves contacting potential lenders to inquire about their offerings and compare terms, interest rates, and fees. Many lenders allow initial inquiries and full applications to be submitted online, over the phone, or in person.

After selecting a lender, the formal application is submitted. For secured loans such as home equity loans or mortgage refinances, a property appraisal or home valuation is usually conducted to determine the home’s current market value. This appraisal helps confirm the home’s equity for the loan-to-value calculation.

The application then moves into the underwriting phase. During underwriting, the lender reviews all submitted documents to verify financial information, assess creditworthiness, and ensure compliance with lending guidelines. This stage involves examining income, assets, debts, and credit history. If underwriting is successful, the loan receives approval.

The final stage is the closing. A few days before closing, the lender provides a Closing Disclosure document, which outlines the final loan terms, fees, and costs. At closing, the borrower signs the new loan documents, and any required closing costs are paid. Funds from the new loan are then disbursed, typically paying off the existing solar loan.

Key Considerations Before Refinancing

Before committing to a solar loan refinance, evaluate several financial aspects. Understanding the costs involved is a primary consideration. Refinancing can incur various fees, such as origination fees, appraisal fees, and other closing costs, which can range from 2% to 6% of the total loan amount. Some existing solar loans may have prepayment penalties, which are fees charged for paying off the loan before its scheduled term. These costs reduce the overall financial benefit of refinancing.

The new interest rate impacts future monthly payments and the total cost of the loan over its lifetime. A lower interest rate can lead to substantial savings, while a higher one could increase the overall financial burden. Loan terms also play a role; extending the loan term can lower monthly payments but generally results in paying more interest over the life of the loan. Conversely, shortening the term increases monthly payments but reduces the total interest paid.

Refinancing may also have implications for any existing solar incentives or warranties. While generally not an issue, confirm that changing the loan structure does not affect eligibility for federal or local solar tax credits or any manufacturer warranties. For instance, the federal solar tax credit is typically claimed after installation, but some solar loans are structured with a balloon payment tied to this credit.

The impact on a credit score is another factor. Applying for new credit results in a “hard inquiry” on a credit report, which can temporarily lower a credit score by a few points. While this dip is usually minor and short-lived, especially with on-time payments, it is a factor to acknowledge. If multiple inquiries are made within a short period, such as 14 to 45 days, they may be grouped as a single inquiry by credit scoring models.