How to Pay for Solar Panels for Your Home

The adoption of solar energy for homes continues to gain momentum, driven by a desire for energy independence and environmental benefits. While long-term savings are clear, the initial investment can be a financial consideration. Understanding payment approaches and available incentives is important for informed decisions about transitioning to solar energy.

Purchasing Solar Systems

Homeowners who directly own their solar panel systems can pursue several financing avenues. Direct ownership allows maximizing long-term savings and fully benefiting from associated incentives.

Cash Purchase

A cash purchase involves paying the full upfront cost for the solar panel system. This method eliminates interest payments or loan fees, leading to the lowest overall cost over its lifespan. Homeowners retain complete control over the asset, which can also contribute to an increase in home value.

Dedicated Solar Loans

Dedicated solar loans provide a financing option specifically designed for solar installations. These loans can be secured, using the solar system or the home as collateral, or they can be unsecured. Interest rates typically range from 4% to 10% Annual Percentage Rate (APR). Loan terms commonly span 5 to 25 years. Homeowners own the system immediately upon installation, making monthly payments to repay the loan principal and interest.

Home Equity Loans and HELOCs

Home equity loans or Home Equity Lines of Credit (HELOCs) leverage existing home equity. To qualify, homeowners typically need 15% to 20% equity, a good credit score, and a debt-to-income ratio generally below 50%. Home equity loans provide a lump sum with a fixed interest rate, repaid over a set period, often up to 30 years. HELOCs offer a revolving line of credit, allowing homeowners to draw funds as needed during a draw period, followed by a repayment period. With both options, the home serves as collateral, and the homeowner retains full solar system ownership.

Leasing Solar Systems

Beyond direct purchase, homeowners can opt for arrangements where a third party owns the solar panel system. These models typically involve lower upfront costs, but the homeowner does not gain equipment ownership.

Solar Lease

A solar lease involves a third-party company owning, installing, and maintaining the solar panels. The homeowner pays a fixed monthly fee for system use, similar to a rental agreement. Lease terms commonly range from 10 to 25 years. The leasing company is generally responsible for all maintenance, monitoring, and repairs. Some lease agreements include escalator clauses, with predetermined annual increases in the monthly payment.

Power Purchase Agreement (PPA)

A Power Purchase Agreement (PPA) is an arrangement where the homeowner pays a fixed rate per kilowatt-hour (kWh) for electricity generated by the solar panels. The third-party provider designs, installs, owns, operates, and maintains the system. The PPA rate is typically set below the local utility’s retail electricity rate. PPA terms usually range from 10 to 25 years, and often include an annual price escalator, typically between 1% and 5%. Under a PPA, the homeowner pays only for electricity produced, not a fixed monthly equipment fee.

Financial Incentives

Various financial incentives can significantly reduce solar installation costs, improving financial viability for homeowners. These incentives are typically contingent on the homeowner owning the solar system.

Federal Solar Tax Credit

The Federal Solar Tax Credit (ITC) is a substantial incentive for residential solar installations. For systems installed through December 31, 2025, homeowners may be eligible to claim a tax credit equal to 30% of the total system cost. This credit is a dollar-for-dollar reduction in federal income tax owed, applying to equipment, labor, installation, and permitting fees. Homeowners must own the solar system to claim this credit, as leased systems typically do not qualify. If the credit amount exceeds tax liability, any unused portion can generally be carried forward. The credit is claimed by filing IRS Form 5695.

State and Local Programs

Beyond the federal incentive, various state and local programs offer additional financial benefits. Some states provide direct cash rebates for solar installation, reducing the upfront cost. Performance-based incentives, such as Solar Renewable Energy Credits (SRECs), offer financial return. Homeowners earn one SREC for every 1,000 kilowatt-hours (1 megawatt-hour) generated. These tradable credits can be sold to utility companies to meet state-mandated renewable energy targets, providing an ongoing income stream.

Property Tax Exemptions

Property tax exemptions are offered in many jurisdictions, preventing an increase in property taxes due to the added value of a solar installation. These exemptions can be full or partial and vary in duration, ensuring homeowners are not penalized with higher annual tax bills.

Sales Tax Exemptions

Sales tax exemptions on solar equipment and installation services are available in some states. These exemptions reduce the initial purchase price of the solar system, making it more affordable.

Net Metering

Net metering is a billing mechanism that credits solar energy system owners for excess electricity sent back to the grid. The utility company applies credits to the homeowner’s electricity bill, which can significantly offset or even eliminate monthly electricity costs. While net metering can reduce the amount owed, utilities may still levy a small monthly interconnection fee, typically ranging from $10 to $20.

Evaluating Payment Approaches

Understanding the financial distinctions between purchasing and leasing solar systems is important for homeowners considering this investment. Each approach carries different implications regarding initial outlay, asset control, and ongoing financial commitments.

Upfront Costs

Upfront costs represent a primary differentiator among payment methods. A cash purchase requires the largest initial investment. Solar loans and home equity loans or HELOCs typically involve moderate upfront costs, often limited to down payments or closing fees. In contrast, solar leases and Power Purchase Agreements generally require little to no upfront capital, making solar accessible without a significant initial expenditure.

Ownership

Ownership is a fundamental aspect that impacts financial benefits and control. When a homeowner purchases a solar system, they own the asset, which qualifies them for various incentives like the federal tax credit and can increase the home’s value. With leased systems or PPAs, the third-party company retains ownership, meaning the homeowner does not receive these ownership-based financial incentives and may face complexities when selling the property.

Long-Term Financial Commitment

The long-term financial commitment also varies considerably. Loan payments for purchased systems are typically fixed for the loan term, providing predictable expenses. Leases also often have fixed monthly payments, though some may include small annual escalators. PPA rates are based on electricity usage and may also have a pre-determined annual increase, but they often remain below traditional utility rates.

Maintenance Responsibility

Maintenance responsibility is another distinguishing factor. Homeowners who purchase their systems are generally responsible for any necessary maintenance or repairs. Under a solar lease or PPA, the third-party owner typically handles all system maintenance, monitoring, and repairs, providing peace of mind to the homeowner regarding the system’s operational upkeep.