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.
Home equity lines of credit at a glance
- Home equity lines of credit are a financing option that let you borrow money against the equity of your home.
- The borrowed amount is usually capped at a certain percentage of your total equity, typically 80%.
- HELOCs have variable interest rates, which can make payments unpredictable.
- You can use a HELOC to finance a home solar panel installation and still get solar incentives.
- If you can’t pay back the borrowed amount within a few years, you may be better off using a solar loan with a locked-in interest rate.
What is a HELOC, and how does it work?
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!
Borrowed amount
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.
HELOC 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.
Qualifying for a HELOC
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.
Pros and cons of using a HELOC for solar panels
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.
Pros of HELOC
- Low interest rates: A Home Equity Line of Credit is secured by your home, which often means you can get a lower interest rate than other loan options.
- Eligible for solar incentives: Financing solar panels with a HELOC allows you to use solar incentives like the 30% federal solar tax credit.
- Use when you need: With a HELOC, you can open an account and only use the funds once you need them! So, you can start setting up your HELOC before you find an installer, and you don’t have to worry about paying interest until you use it.
- Interest-only payments: HELOCs typically have a draw period of 10 years. When you borrow money during this time, you can make low, interest-only payments and only have to pay towards the principal if it’s in your budget. However, you will have to pay interest and principal payments after the draw period.
- Interest could be tax deductible: The IRS says that you can deduct interest payments from a HELOC from your taxes, so long as you use the money to improve the home that secures the loan. There are certain limitations. You should consult with a tax advisor to confirm if your purchase qualifies.
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.
Cons of HELOC
- Variable interest rates: Though you can sometimes get lower rates through a HELOC, it will almost always be variable. This means your payments will be somewhat unpredictable, making it hard to budget and determine a return on your investment.
- Home as collateral: Having a HELOC secured by your home does mean lower interest rates, but it also means that if you default on payments, you’re at risk for foreclosure.
- Drop in equity: Because you’re borrowing against your home equity, if the value of your home drops for whatever reason, you could end up owing more than what your home is worth.
- Easy to overspend: When you have a HELOC, it can be easy to make purchases without thinking about your monthly payment. Financing this way requires you to be conscious of your purchases and ensure that they fit into your budget.
Is it better to use a HELOC or solar loan for solar panels?
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.
Find reliable solar installers to get the best financing
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.
Jen Merithew
Written Content Manager
Catherine is the Written Content Manager at SolarReviews, where she has been at the forefront of researching and reporting on the solar industry since 2019.