To avoid rising energy costs and benefit from increasing renewable energy incentives and tax breaks, more homeowners may be considering a home solar system. Last year, the growth of residential solar in the U.S. boomed. Even as overall growth of solar installations, including commercial and utility-scale projects, decreased year over year, residential solar projects grew by a “staggering” 40%, to just under six gigawatts, according to the Solar Energy Industries Association. That growth came across a record 700,000 U.S. homeowners who installed solar in 2022. 

There are a host of complicated issues in the solar market, including some contentious politics. Battles remain over foreign sourcing of solar energy components and tariffs on imports from China — President Biden recently vetoed a bill that would have re-imposed tariffs and likely driven up costs throughout the solar supply chain. Net metering, a primary way homeowners can be repaid by the grid for generating their own energy, took a big hit in California — the nation’s biggest solar market — last year, and that is expected to lower overall growth of residential projects this year. And lending conditions throughout the credit market are tighter today due to Federal Reserve interest rate hikes, driving up loan rates for solar projects.

Financing may be necessary or at least well worth considering for most homeowners interested in upgraded their home energy with solar. The national average for a 10 kilowatt solar panel installation in 2023 is around $20,000 after taking into account a 30% federal solar tax credit, according to EnergySage, a marketplace that connects consumers with energy companies. Loans have boomed as a way to finance solar, and even as low and in some cases zero-interest rate offers disappear, higher retail utility bills continue to make lending rates reasonable. According to energy consulting firm Wood Mackenzie, the loan segment’s record share of the residential solar market reached roughly 70% of projects in 2022. It won’t repeat that in 2023, but will remain a large part of the solar market.

Starting with the basics is the best way for homeowners to start wrapping their heads around solar power financial decisions. Here are some key things to consider before making the decision to move ahead with a residential project.

Do your research on state-by-state solar costs

“Before you investigate how you are going to pay for it, it’s easy to find out what you might want to buy and what it might cost,” said Joel Rosenberg, a member of the special projects team at Rewiring America, a nonprofit focused on electrifying homes, businesses and communities.

He recommends using EnergySage to find competing solar quotes. This will give homeowners a better idea — beyond nationwide averages — based on real-life factors such as the size of the system. This is important to understand before they start considering how to pay for it, he said. 

Seek out local energy financing programs

Once homeowners are ready to dig more into financing options, their state’s energy office and a local electric utility can be good places to start because both may offer solar financing programs.

“They may not be directly involved, but often they can flag things that may be worth looking into,” said Madeline Fleisher, an Ohio-based environmental and energy lawyer who runs a clean-energy website.

Ohio, for example, has a state program that offers a reduced rate on a solar loan with certain lenders.

Get solar loan quotes from multiple lenders

Consumers should seek quotes from three to five sources, being sure to pay careful attention to terms and conditions, said EnergySage CEO Vikram Aggarwal.

Potential lenders can include a homeowner’s local bank, credit union, national bank or a specialized institution known as a green bank that focuses on loans for environmentally friendly projects.

Green banks may have even more robust offerings, Fleisher said. Using a simple Google search for “green bank” and your state may yield options. To find potential lenders, homeowners can also consult broader industry sources such as the Green Bank Network or the Coalition for Green Capital.

Consider solar installation company offers carefully

Solar installers, such as Sunrun and Sunnova, also offer loans.

Most installers offer loans for a duration of 15, 20 or 25 years, while banks may offer short-duration loans at lower interest rates and for lower fees, Aggarwal said. Interest rates can vary widely depending on factors such as the loan amount, duration and the strength of the borrower’s credit. Typical loan amounts are $1,000 to $100,000, and annual percentage rates for people with excellent credit can range from around 6% to about 36%, according to a recent analysis by Nerdwallet. 

“Installers are great at installing solar, but they may not be experts at finance or banking,” said Jason MacDuff, president of greenpenny, a virtual and carbon-neutral bank focused on financing sustainable projects.

He said any homeowner considering a loan through an installer should make sure to speak directly to the financer. Homeowners should seek to fully understand the financial arrangement they are entering into, he said. For instance, will it be a fixed or variable rate? What are the upfront financing costs? And what is the projected monthly payment?

It’s also worth noting that installers don’t always mention the fees, so be sure to ask about the installation cost if paying cash versus financing, Aggarwal said. Prepayment fees aren’t likely, but it’s worth asking and confirming in the loan documentation, just to make sure, he said.

Scrutinize fees, terms and conditions on solar debt

Consumers should always ask what fees are associated with the loans being offered, in addition to the interest rate, since fees could amount to thousands of dollars.

Homeowners should also be familiar with other terms, conditions and options that may be available. For example, some loans allow the borrower to amortize once to reduce the amount. To illustrate, if a homeowner takes a $10,000 loan and then receives a tax credit of $3,000, the money can be used to pay the lender and bring down the loan to $7,000. Generally, this option, when available, can be used once within the first 12 to 18 months of the loan, Aggarwal said.

Home equity loans and HELOCs could be a good option for homeowners who have built sufficient equity in their home. These options could also work well for homeowners whose credit doesn’t allow them to qualify for a personal loan with a favorable rate, according to Bankrate.

Be careful about lending risks that can lead to home foreclosure

The last thing any homeowner should do is let a green finance loan lead to foreclosure. That has been a concern for the Federal Trade Commission and the government’s consumer watchdog, the Consumer Financial Protection Bureau. Property Assessed Clean Energy (PACE) loans, secured by a property tax lien on the borrower’s home, have been used over the past decade to finance renewable energy home improvements like solar power and were particularly popular several years ago. 

The CFPB has worried about lenders that aren’t operating on the level, and these loans leading borrowers to fall behind on mortgage payments, and to a deterioration in credit worthiness. A new proposal from the CFPB seeks to protect homeowners from “unscrupulous companies” offering “unaffordable loans with exaggerated promises of energy bill savings,” according to a recent statement from CFPB Director Rohit Chopra.

The solar finance market is dominated by a handful of players

While there are many options for loans in the residential solar market, the data shows that total lending volumes are dominated by five players that financed 71% of the entire residential market in 2022, according to Wood Mackenzie. That was similar to 2021’s lending market. GoodLeap (26% of the residential solar market) was No. 1 overall.

Sunrun and Sunnova together captured 79% of the third-party-owned market for home solar. This brings up another key decision for homeowners: should they finance and own the system themselves or lease the rights to their solar energy generation?

Solar leasing is poised to be more popular, but has downsides

Leasing options exist and may be attractive to some homeowners as a way to avoid the upfront costs of equipment and installation. Another benefit is that the homeowner isn’t responsible for maintenance. Leasing to homeowners is expected to become more popular this year, according to Wood Mackenzie, because of additional credits leasing companies can receive under the Inflation Reduction Act. These “adders” beyond the core 30% tax credit make the economics more attractive to companies that lease solar systems to homeowners.

But there are downsides for homeowners. 

Leasing is generally more expensive for homeowners and they won’t be eligible for the 30% tax credit, Aggarwal said. Leasing can also present several challenges when homeowners decide to sell their house, so it’s important to weigh the pros and cons carefully, Aggarwal added.

If considering this route, homeowners should be sure to understand the specifics about the lease process, MacDuff said. They should, for example, know how the lease payments compare with their existing utility payment and what the repair process will be if issues arise.

Solar prices continue to drop, so rushing isn’t the right decision

The tax credit that was extended and increased as a result of the Inflation Reduction Act makes the cost of solar installation more palatable for consumers, Rosenberg said. But if it’s still out of reach financially, even with a loan, check back from time to time because prices continue to drop and homeowners have 10 years to qualify for the IRA incentive.

“You can get a quote in 2023 and a quote in 2026 and it might be two-thirds of the cost and you can still get the tax credit,” he said.