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Your Guide to Going Solar with a HELOC

Your Guide to Going Solar with a HELOC

If you’ve recently received quotes for solar panel installations, you might have encountered a surprising cost increase, particularly if you’re considering financing the solar system.Interest rates for loans have surged recently, and this trend also extends to loans for solar projects. When factoring in additional dealer fees, the amount you need to finance could escalate by 20%, 30%, or even 50% compared to upfront cash prices.

Understandably, you’re exploring alternative methods to cover the expenses of installing solar panels. One viable choice involves obtaining a Home Equity Line of Credit (HELOC), which entails borrowing against your home’s equity to finance your project. A HELOC is utilizing for various home improvement undertakings, including installing solar panels on your roof.

What is a HELOC, and how does it work?

A Home Equity Line of Credit (HELOC) functions similarly to a credit card. Just as a credit card allows you to borrow money up to a certain spending limit, a HELOC enables you to borrow funds based on the equity you have in your home.

When you opt for a HELOC, you approach a lender or a bank. They will evaluate your property to establish the amount of equity you possess. Using this valuation, they will grant you approval for a specific sum, akin to the spending limit on a credit card. Subsequently, you can access these approved funds and utilize them as needed.

Limit on Borrowing:

There is typically a cap on the percentage of your home’s value you can borrow through a HELOC. Most HELOC lenders adhere to a maximum limit of 80% of your home equity. For instance, if your equity amounts to $100,000, the highest amount you can borrow would be $80,000.

However, these limits can differ among lenders. Some might extend higher borrowing limits, such as 85% or even 90%, but opting for these higher limits could result in elevated interest rates.

Interest Rates for HELOCs:

When you borrow money through a HELOC, you are required to pay interest on the borrowed amount. HELOCs commonly feature variable interest rates that adjust with fluctuations in base interest rates. The lender establishes the interest rate for the HELOC, often equal to the base rate plus an additional percentage based on your credit history.

For example, assuming a base rate of 7% and the lender applying an extra 1% due to your credit, the total interest rate for the HELOC would be 8%. If the base rate rises to 8%, your new interest rate would become 9%. As of 2023, HELOC interest rates typically range from 7.5% to 9%, although these figures can vary depending on the specific lender and borrower circumstances.

Eligibility for a HELOC:

You can secure a HELOC if you possess equity in your home, maintain a satisfactory credit score, and fulfill specific criteria related to your debt-to-income ratio. Different lenders will have distinct sets of qualification standards.

Pros and Cons of Using HELOC for Solar Panels:

HELOCs offer flexibility for various purchases, including financing solar panel installations. However, it’s important to thoroughly evaluate the benefits and drawbacks of utilizing a HELOC for this purpose.

Pros of HELOC for Solar Panels:

  • Favorable Interest Rates: A significant advantage of a Home Equity Line of Credit is that it is secured by your home’s equity, often resulting in more attractive interest rates than alternative solar loan options.
  • Access to Solar Incentives: Opting for a HELOC to finance solar panels enables you to leverage solar incentives such as the federal solar tax credit, which can be as high as 30%.
  • On-Demand Usage: With a HELOC, you can easily open an account and access funds as needed. You can initiate the HELOC before selecting an installer and delay interest payments until the funds are utilized.
  • Interest-Only Payments: HELOCs generally come with a draw period, often a decade. When you borrow money during this phase, you can make minimal interest-only payments—payments towards the principal defer based on your budget. However, once the draw period concludes, you must repay interest and principal.
  • Potential Tax Deductions: The Internal Revenue Service (IRS) permits deducting interest payments from a HELOC on your taxes, given that the borrowed funds are utilized to enhance the secured home. Specific limitations apply, so consulting a tax advisor to confirm the eligibility of your purchase is advised.

Cons of HELOC for Solar Panels:

  • Secured by Home Equity: While your home’s equity ensures a HELOC’s lower interest rates, it also means that your property is on the line. If you are unable to meet payments, your home could be at risk of foreclosure.
  • Variable Interest Rates: HELOCs typically come with variable interest rates, which can fluctuate with changes in base interest rates. That could lead to unpredictable payment amounts over time.
  • Potential Over-Borrowing: The availability of funds through a HELOC might tempt you to borrow more than you need, leading to unnecessary debt.
  • End of Draw Period: Once the draw period ends, you must repay both the principal and interest. This transition could result in higher monthly payments.
  • Application and Closing Costs: Acquiring a HELOC involves associated fees, including application and closing costs, which can add to the overall expense of using this financing method.

Before proceeding with a HELOC for solar panels, carefully weigh these advantages and disadvantages to make an informed financial decision.

Is choosing between a HELOC or a solar loan more suitable for financing your solar panel installation?

Determining the optimal solar financing option is not a one-size-fits-all decision. Your selection between a solar loan and a HELOC hinges on your circumstances. Nonetheless, we can guide you through key factors to contemplate while making your choice for panel financing.

Opting for a home equity line of credit (HELOC) is typically advantageous when you lack the immediate upfront funds for a solar investment but anticipate having the means to repay it shortly. For instance, if you own multiple properties and intend to sell one, obtaining a HELOC, installing solar panels, and settling the debt using the proceeds from the property sale can be a viable approach.

On the other hand, a solar loan operates like a traditional loan, involving borrowing the necessary amount for your solar purchase and fulfilling monthly payments. Solar loans may be more suitable if you seek a prolonged financing solution. That entails committing to an interest rate and gaining clarity on the fixed monthly payment across the loan term. Additionally, the concern of foreclosure due to a missed payment is alleviated.

Dependable solar installation professionals to access optimal financing terms

For the most favorable financing outcome, it’s recommended to engage a financial consultant and request quotations from multiple solar installation companies. A financial advisor can assist in determining whether obtaining a HELOC or exploring alternative loan options aligns better with your financial plan.

Obtaining quotes from at least three solar installation providers will give you insights into the available choices and present you with several alternatives. It’s advisable not to immediately accept the initial quotation you receive – conducting thorough market research is always advantageous. Utilizing our solar calculator can offer you a precise estimate of the potential expenses and savings associated with solar panel installation.

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