There are four methods of paying for your solar system. You can either purchase your system with cash or a loan, enroll in a PACE program, lease your system, or sign up for a Power Purchase Agreement (PPA). Below, we delve into what each option entails and the pros and cons.
Purchase with Cash or Loan
Payment to a Solar Provider or Manufacturer using either cash or loan gives you complete ownership of your system.
There are two types of loans: secured loans and unsecured loans.
Secured loans—You will be required to use an asset as collateral for the loan (the asset is typically your solar system itself)
Unsecured loans—Unlike a secured loan and similarly to a credit card, these do not require any collateral
Secure loans often yield lower interest rates, which might make them more ideal than unsecured loans.
Many Solar Providers work with lenders that offer solar loans, but it may help to reach out to banks and credit unions as well. To ensure that you select the most reasonable interest rate, compare multiple offers side by side with each other.
If you purchased and owned a solar system by the end of 2019, you are eligible for a 30 percent federal tax credit (also known as the ITC). The federal tax credit decreases to 26 percent for systems installed in 2020, 22 percent for students installed in 2021, and then 0 percent for systems installed after 2021. Consult a Certified Public Accountant (CPA) if you have any questions about ITC or would simply like to determine whether a loan is tax-deductible.
Because you are liable for all maintenance and repairs, be sure to save equipment warranties, especially for the inverter, which typically has a lower service life than other equipment and thereby might expire sooner. Additionally, in the event that you sell your home, hire real estate agents and appraisers that are familiar with selling homes that are equipped with solar systems. You may include the system in the house sale just like any other major home component.
Pros:
Typically offers a greater return on investment
If you take out a loan, you can delay your payment.
May increase the value of your home
You might be eligible for tax credits and subsidies. Consult a tax professional to find out if you qualify.
Cons:
You will be required to manage repairs and maintenance on your own. This may entail contacting several different manufacturers, who could go out of business during the 10-20 year component lifecycles.
Because some solar loans may place a lien on your property, this can complicate efforts to sell your home or refinance your mortgage. Worse, it might cause your home to foreclose.
Questions to Ask a Lender About the Purchase of a Solar System with a Loan:
What is the total cost of the loan over the entire course of the contract?
How much will I pay upfront, how much over time, and for how long?
What is my interest rate? What is my annual percentage rate (“APR”)?
Who do I contact if I have questions about my loan payments?
Will a solar loan make it more difficult for me to sell or refinance my home? Will I need to buy out my loan? Who do I contact?
PACE Financing
Under a PACE program, a PACE Program Administrator pays all of the upfront costs of your solar system, which you then pay through an assessment on your property tax bill. Similarly to the purchase option, you will own the solar system. PACE is only available in some areas of California.
The PACE agreement will be active for a fixed term, typically around 10-30 years. It will also be attached to your house, meaning that you will be responsible for paying all fees during this time, even if you decide to sell your house. If you sell your house while the arrangement is still active, the person buying your house may make you pay off whatever is remaining in the agreement, which could be thousands of dollars. PACE financing can also make it difficult to buy other properties since some mortgage lenders will not loan money to you if you have not paid off the entire lien.
Under a PACE agreement, payment is usually due once or twice a year along with your property taxes. Because you do not pay on a monthly basis (like you would with leases and Power Purchase Agreements), it is due in larger amounts. It’s often helpful to determine how much you will owe and when so that you can set aside enough money throughout the year to cover the payments.
If your house is mortgaged and you typically pay your taxes with an escrow or impound account, be aware that your mortgage company may increase the amount you pay monthly to cover the anticipated increase to your property tax bill. Discuss how PACE will affect your monthly mortgage payment before you sign an agreement.
Again, be aware that if you fail to make your PACE payments included with your property taxes or mortgage, your house can be foreclosed.
Pros:
You will have to pay little to no upfront costs
You may be able to delay your payment farther than you would for a regular loan
Similarly to the purchase option, you may qualify for tax credits and deductions. (Again, confirm with a tax professional if you are eligible)
Cons:
Enrollment in a PACE program will place a lien on your property, and you might be required to pay off the PACE assessment before proceeding with any refinancing.
The lien, similarly to the purchase option, might also complicate selling your house or refinancing your mortgage. Worse, it might cause your home to foreclose.
You must manage all repairs and maintenance on your own. This might entail contacting several different manufacturers, who could go out of business during the 10-20 year component lifecycles.
Questions to ask a PACE Program Administrator about a PACE Financed System:
What is the total cost of the financing over the entire course of the contract?
How much will I owe for PACE financing when I pay my mortgage or property taxes?
What happens if I want to sell or refinance my home? Will selling or refinancing be more difficult with PACE? Is there anything I have to do with the mortgage company?
What are the penalties for failing to pay the assessment on time?
Who do I contact if I have problems making my PACE payments?
Lease and PPA
Unlike the PACE financing and Purchase option, you will not own the solar system when you lease it. Instead, you will “rent” it from your Solar Provider for a set amount of time, paying them monthly in exchange for all of the electricity the system produces. Usually, the contract period is 20-25 years.
Similarly to the lease option, under a Power Purchase Agreement, you will not own your solar system and will instead pay your Solar Provider in exchange for all of the electricity produced. However, rather than paying the Solar Provider monthly, you will pay for all the power the solar system produces. In your contract, you will find the kilowatt-hour rate you will pay in the first year and the year after that. This rate is usually lower than your current electricity rate. The PPA will typically stay active for 20-25 years.
You will be responsible for paying all fees when the contract is active, even if you decide to sell your house or not. If you do sell your house before the Lease or PPA expires, you will have to pay your Solar Provider the leftover amount, unless the new owner agrees to take on the contract. Be aware of all the terms and details outlined in the contract, as buying out a Lease or PPA can cost thousands of dollars.
Most Leases or PPA contracts will have an “escalation clause” or “escalator,” meaning the amount you have to pay will increase by a certain amount every year. The amount that it will increase will typically be between 1 and 3 percent. In fact, very rarely will a contract contain an escalation higher than 3%, so be especially wary of the amount that is specified in the contract.
There may be different ways to arrange Leases and PPAs, such as paying more upfront to reduce your monthly payments.
Pros:
Little to no upfront costs
Your Solar Provider manages all monitoring, maintenance, and repairs
Minimum energy production often guaranteed
Cons:
You might have more difficulty selling your house than you would with a purchased system. Unless the new owner adopts the lease/agreement, you will either be required to either continue making payments or buy out the agreement, which could amount to thousands of dollars.
There is a possibility that your Solar Provider will go out of business, even when the contract is still active.
Questions to Ask a Lender or Solar Provider About a Lease or PPA:
What is the total cost of the solar system or solar energy over the entire course of the contract?
How much will I pay upfront, how much over time, and for how long?
Will my payments increase over time? How much will they increase, and how frequently?
Is there an option to make a down payment to reduce my monthly payments (for a Lease) or kilowatt-hour rate (for a PPA)?
What happens if I wish to end the Lease or PPA early?
If I end my agreement early, will I owe a balloon payment and/or an early termination fee? If so, how much will I owe?
Will a Lease or PPA make it more difficult for me to sell or refinance my home?
Source: www.cpuc.ca.gov/solarguide