Your guide to going solar with a HELOC
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If you’ve gotten solar quotes lately, you’ve probably experienced some sticker shock, especially if you’re looking into financing your solar system.
Interest rates for any loan have been through the roof lately, and solar loans are no exception. Once you add dealer fees into the mix, you could see your financed amount jump by 20%, 30%, or even 50% over cash prices.
We don’t blame you for looking for alternative ways to pay for solar panels. One option is to take out a Home Equity Line of Credit (HELOC), where you borrow money against your home’s equity to fund a project. You can use a HELOC for several home improvement projects - including rooftop solar installations.
You can think of a Home Equity Line of Credit as a credit card. With a credit card, you borrow money against your spending limit. When you take out a HELOC, you borrow money against the equity in your home.
What is home equity? Home equity is the difference between how much your home is worth and how much you owe in liens on the property. Or, to put it simply, your property’s value minus how much you have left to pay on your mortgage. Let’s say your home is worth $300,000, and you have $200,000 left on your mortgage; you have $100,000 in equity.
If you want to take out a HELOC, you go to your lender or bank, who’ll assess your property to determine how much equity you have. From there, they’ll approve you for a certain amount that you can think of, like your credit card’s spending limit. Then, you can use the money!
There’s usually a limit to how much of your home value you can borrow. Most HELOC lenders have a limit of 80% of your total equity. So, if you have $100,000 in equity, you can borrow a maximum of $80,000.
These rates will vary between lenders. Some may offer higher rates, around 85% or 90%, but these could lead to higher interest rates.
If you borrow money, you’ll have to pay an interest rate. HELOCs typically have variable interest rates that change as base interest rates do. The lender sets the rate for a HELOC, and is usually equal to the base rate, plus additional based on your credit history.
So, if the base rate is 7% and the lender adds 1% based on your credit, your total interest rate for the HELOC will be 8%. If the base rate rises to 8%, your new interest rate will be 9%. HELOC interest rates in 2023 are sitting between 7.5% and 9% but vary depending on the lender and borrower.
You can only take advantage of a HELOC if you have equity in your home, have fair credit, and meet certain debt-to-income ratio requirements. Each lender will have a different set of qualifications.
HELOCs can be used for almost any purchase, including solar panel installations. But before you get on the phone with a lender, be sure to consider the advantages and disadvantages of HELOCs.
Balloon payments. Most HELOCs have two periods: the draw period, when you use the money and make interest-only payments, and the repayment period, where you pay back the money and make interest and principal payments. Some HELOCs require you to pay back the entire borrowed amount at the end of the draw period. Double-check if this is a condition for your HELOC, as that could be a hefty payment.
There is no one size fits all answer to solar financing. Whether or not you should use a solar loan or a HELOC depends on your situation. But we can give you tips on what to consider when choosing how to finance your panels.
A home equity line of credit typically works best if you don’t have the upfront capital to go solar right now, but will have the money to pay it off in the short term. For example, if you own two properties and plan to sell one, you can get a HELOC, install solar panels, and then pay it off with the money you get from selling your second property.
A solar loan works just like a traditional loan, where you borrow the amount needed for your purchase and make monthly payments. Solar loans might be better if you are looking for a long-term financing solution. You’ll be locked into an interest rate and know exactly how much you need to pay each month over the term. Plus, you don’t have to worry about your foreclosure if you miss a payment.
To really get the best financing outcome possible, you should consult with a financial advisor and get quotes from multiple solar companies. A financial advisor will help you decide if taking out a HELOC or going with another type of loan is better for your budget.
Getting quotes from at least three solar installers will give you an idea of what options are out there and gives you a few different choices. Don’t just go with the first quote you get - it’s always best to shop around! You can use our solar calculator to get an accurate estimate of how much solar panels could cost (and save!) you.