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Sep 26, 2022

How to Refinance a Solar Loan?

If you’re having trouble repaying your solar loan and would like to avoid going through some gnarly situations, refinancing the solar loan may be your best bet. The solar loan you took out might have experienced a change in interest rate, prompting you to react.

Whatever the case may be, choosing to refinance a solar loan is a good idea for various reasons. However, the most important one is feeling more comfortable with how you repay the loan. 

In this article, we’ll explore the process involving solar loan refinancing by looking at the three options you can choose from. So, without further ado, here’s how to refinance a solar loan effectively. 

Why is Refinancing a Solar Loan a Good Idea?

Solar loans are a comfortable and effective way of enabling the installation of solar systems for your home. However, sometimes these solar loans don’t turn out well and you might end up needing to refinance them with another lender. 

Solar loan refinancing may give homeowners a bit more leeway in handling loan repayments, with relatively low cost increases (depending on the lender). The trick to refinancing a solar loan correctly is finding the best method for your current situation. Here’s what we mean:

Refinance a Solar Loan with One of Three Main Methods

The three primary choices regarding solar loan refinancing are HELOC, Cash-Out, and a home renovation mortgage. The best one for you depends on several factors, including the amount of equity you have in your property, your current mortgage rate, and your personal financial goals and needs. 

Each method is efficient in its own right but you should always do your research before choosing one. Ideally, you’ll also want to contact a few lenders of your choice to gain more information on what they offer so you can pick the best one. 

HELOC (Home Equity Line Of Credit)

A HELOC or home equity loan is the best choice if you can’t reduce your mortgage rate by refinancing but have enough home equity. It’s also a sensible option if you aren’t looking to refinance your original mortgage due to a low mortgage rate or any other reason. 

In essence, the HELOC loan is best for people who just want to pay off their solar loan because they’ll be borrowing less money. This makes home equity loans excellent for specific, targeted financing goals since the closing costs are generally lower than with other options. 

And, because the loan amount is lower than what you’d get with a full refinancing, you’ll have less interest on your loan for as long as it's active (not repaid). An additional benefit of home equity loans is that certain lenders allow a higher CLTV (combined loan-to-value) ratio of up to 90%. 

The Cash-Out Refinancing method is not possible if you lack the home equity it requires (cash-out usually uses 80% maximum LTV) which makes a home equity loan an excellent alternative choice, provided the lender applies the higher CLTV ratio. 

Home equity lines of credit may be cheaper than your existing solar loan! HELOC loans generally have between 4% and 6.5% APR (Annual Percentage Rate), so it’s important to compare multiple lenders to find the best deal. 

Cash-Out Refinancing Method

Compared to the HELOC loan, a Cash-Out Refinancing option will reduce your existing mortgage rate and the total monthly debt repayment amounts. This effect is amplified if your new rate (for the refinancing) is lower than the solar loan interest rate. 

Here’s a quick example: If your current mortgage rate is 5.500%, with the solar loan interest rate being also 5.500%, and the Cash-Out Refinance rate is 4.500%, you’ll lower your monthly debt costs by refinancing. 

The Cash-Out Refinancing method is also an excellent choice if you’re looking to simplify your finances since it allows two loans to be consolidated into one mortgage. You can even refinance into a fixed-rate mortgage from an ARM (Adjustable-rate mortgage) or an interest-only loan. 

Fixed-rate mortgages are safer and more stable so it might be worthwhile to do so if your ARM isn’t good enough anymore. 

Keep in mind that this method generally has stricter and tighter qualification needs and requirements, especially when it comes to credit scores. On top of that, they usually come with higher mortgage rates than traditional refinancing options. 

Lastly, the Cash-Out Refinancing method’s mortgage gets categorized as a cash-out option, regardless of whether or not you receive any loan proceeds. The goal is of course to get some of that value of the solar installation back in the form of cash. 

Now, as far as how you can qualify for a Cash-Out Refinance, here’s what you need to know: It is only a viable choice if you have sufficient home equity since you’ll have to pay off the existing mortgage and the solar loan. You also can’t exceed the lender’s LTV ratio. 

The maximum LTV ratio is usually around 80% which means you’ll be able to borrow up to that value percentage of your property. Certain US states (for example, Texas) treat Cash-Out Refinances differently, so make sure to check with your local lenders. 

Note:  You may be rejected if your home equity isn’t high enough to pay off both the mortgage and the solar loan but - the good news is that, since the solar system is already installed in your home, its property value will go up, potentially making it easier for you to qualify. 

Home Renovation Mortgage

Home renovation mortgages are generally considered when one is buying a home, but they’re also great when it comes to solar loan refinancing and mortgage refinancing. Home renovation mortgages don’t include every sort of home improvement but adding a solar system is quite a large one. 

They’re such a great choice for refinancing because they come with much higher LTV ratios than what you’d get with a Cash-Out Refinance. This might be the best alternative if your home equity is too low for a Cash-Out. 

There are a couple of popular home renovation mortgage programs which might interest you and we’ve decided to cover three of them:

  • FHA 203(K) - This mortgage allows a 97.75% LTV ratio for a refinance of your choice. This LTV ratio is higher than what’s used in a Cash-Out option; it also means your maximum mortgage amount will be higher. FHA 203(K) mortgages can only be received from approved lenders such as credit unions, mortgage brokers, and banks.

  • HomeStyle Renovation - This mortgage gives you a 97% LTV ratio which enhances your refinancing capabilities. You’ll have to submit differing documentation and follow different guidelines depending on whether you plan to refinance a solar loan or invest in your property.

  • CHOICERenovation - Another home renovation mortgage with a high LTV ratio of 97%. You can get this program through traditional lenders as well. 

What are the Interest Rates for Refinancing a Solar Loan?

Although there are stark differences in interest rates among all of these solar loan refinancing options, the interest rates themselves generally won’t be too outlandish. However, you also have to remember that your home equity, existing mortgage(s), and current solar loan interest rate can all impact the refinancing interest rate. 

In most cases though, you can expect interest rates between 5% and 8%, depending on the lender and your current situation. 

As a last piece of advice - always take your time to research the lenders and their refinancing options and terms properly. Finding the best deal is imperative, as is figuring out the best refinancing method for your solar loan and mortgage status. 

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