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Jul 4, 2022

Is a solar loan or a HELOC better for home solar financing?

If you’re installing a solar system on your roof, chances are you’re starting to look closely at your financing options. The primary financing options available to homeowners are a residential solar loan and a Home Equity Line of Credit (HELOC). 

This article breaks down the benefits and costs of both of these options. 

Benefits of using a HELOC to finance your home solar system

What’s a HELOC?

A Home Equity Line of Credit is a common financial tool for many homeowners and mortgage lenders. Specifically, a HELOC is a revolving line of credit secured by your home. 

These types of credit facilities are typically issued by your primary banking provider. They are typically used for large expenses or to consolidate higher-interest rate debt on other loans like credit cards. 

A HELOC acts much like a credit card. You can borrow against the available balance, pay it down, and borrow again. You can borrow as little or as much as you need throughout the draw period. Any outstanding balance at the end of the draw period is typically amortized over a repayment period.  

Qualifying for a HELOC

Qualifying for a HELOC requires some equity in your home. Depending on the lender, you can typically borrow up to 80-85% of your home value. For example, if the outstanding balance on your 1st mortgage represents 65% of your home value, you can likely borrow another 15-20% against your home in the form of a HELOC. 

Lenders typically look at credit score and history, employment history, monthly income and debts. All lenders have slightly different criteria so it’s important to understand the lending and credit characteristics your bank may offer. 

Benefits of a HELOC 

The primary benefit of using a HELOC is the lower interest rate. Since your HELOC is secured by real estate, lenders are reasonably comfortable offering low interest rates. A HELOC is inherently more risky than a 1st mortgage loan, so you can expect your HELOC rate to increase by a percentage point or two above the APR on your mortgage. 

Maintaining the simplicity of keeping your debts with a single lender can be a compelling benefit for many people. While not a benefit in economic terms, using a HELOC to finance your solar loan might also mean that you don’t have to establish a new relationship with another financial institution.

Cons of a HELOC

Variable rate loans expose you to interest rate risk. While some lenders offer fixed rate options, many lenders only offer variable rate HELOC facilities. An unpredictable interest rate environment can make it difficult to budget. 

Added time and closing costs. If you don’t already have a HELOC in place, these types of instruments can add significant time and costs to your overall closing time. The typical underwriting process can take from weeks to months for some banks, and you may be stuck getting an updated appraisal. Though your bank may tell you the appraisal is free, there is no such thing as a free lunch, and you can be sure your bank isn’t just eating the cost. Those services are repaid in the form of interest rates or other closing fees.  

Benefits of using a solar loan to finance your home solar system

What’s a Solar Loan? 

In contrast, when seeking financing for a residential solar system, most consumers opt for a solar loan. Solar loans are essentially personal loans secured by the solar equipment with something called a UCC-1 filing. 

Solar loans are typically offered through specialty lenders, but an increasing number of banks are beginning to offer their own solar lending solutions as well. 

One of the most important distinctions between HELOCs and solar loans are that solar loans are not secured against real estate. 

Qualifying for a solar loan

Qualifying for a solar loan is very similar to qualifying for a HELOC. Lenders will look at your credit report and assess your ability to repay your loan based on repayment history of other debts and your monthly income.    

Benefits of a solar loan 

Solar loans allow you to maintain access to home equity. Since a solar loan is not secured against the value of your home, you maintain access to that equity should you need it. Years from now if you find yourself facing significant unexpected costs, you’ll always be able to lean against the value of your home to cover those costs. If you had used up that capacity to pay for your new home solar system, you may be out of luck. 

If you recently refinanced your mortgage and have already borrowed up to maximum levels allowed by your bank, you may not have excess capacity for a HELOC or another mortgage product. 

Fixed rates. Solar loans are typically always offered as fixed rate loans. This is important as you’ll likely want your solar system to reduce the costs of your energy costs. With a variable interest rate, you can’t count on this. And if you find yourself in a rising interest rate environment (ahem… 2022!), then locking in rates for the long-term is likely a prudent path to take. And typically rates aren’t too much higher than what you might see for a HELOC anyway!

Immediate credit decisioning. One of the key benefits to using a solar loan is the response time. Though this is not true for all solar lenders, many have developed underwriting decisioning logic that can provide you an answer in as little as a couple minutes. That saves you the hassle of going through multiple rounds of questions and reviews with your bank.   

Cons of a solar loan 

Some solar lenders add on significant fees. You’ll want to make sure you know who you’re getting into bed with when it comes to your solar loan. Solar lenders typically aren’t banks and may not be subject to the same transparent lending practices as regulated banks. Whether you know it or not, you may find yourself paying high financing fees upfront, stripping out the long-term value to you, the owner. 

Final thoughts

If you don’t have the cash on hand, you’ll have to weigh the costs and benefits of using a solar loan or another type of financial instrument to pay for your new home solar system. 

Most consumers opt for solar loans over mortgage-backed products for all the reasons noted above. If you do choose to finance your new system with a solar loan, ensure you’re partnering with a lender that has your best interest in mind. 

All solar loans aren’t made the same. 

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