Solar loan re-amortization: What you need to know

Solar loans are a popular way for homeowners to finance a solar energy system if you can’t afford to pay the full cost upfront. A solar system can cost anywhere from $20,000-$30,000 before tax credits and incentives, which makes it a pricey investment for most people, and financing the cost over time helps make it more affordable. 

If you take out a solar loan, you often have the option to re-amortize your loan – also known as loan recasting – which can help lower your monthly payments or pay off your loan faster without having to go through the refinancing process. Here’s what you need to know about how re-amortization works and when it makes sense for you as a solar customer.

When you re-amortize a solar loan, you’re typically required to pay a lump sum that is used to pay down a portion of the principal balance, which in turn lowers your monthly payments. Most solar loans re-amortize around the 18 month mark specifically so that you can use your 30% federal solar tax credit to pay off part of your balance. Since an average solar energy system costs upwards of $20,000, your tax credit will be thousands of dollars, which can put a significant dent in your remaining balance. Your lender agrees to re-amortize your loan in part because they are factoring in the 30% tax credit being used as the lump sum to help pay down your loan. The money for your payment doesn’t necessarily have to come from your tax credit, but most people tend to use it for that purpose when they re-amortize. You aren’t always required to make the lump sum payment, either, but you’ll pay a lot less in interest if you do.

Re-amortizing a loan is similar to refinancing a mortgage in that the goal is to reduce your monthly payments, shorten or extend your loan term, pay less in interest, or a combination of all three. With a solar loan, however, one benefit is that you typically don’t have to go through the application process again to qualify for re-amortization the way you would with refinancing your home.

Depending on your specific loan and your lender, you can re-amortize multiple times over your loan term. Not all solar loans will have a re-amortization option, so it’s important to check with your lender when you sign your loan agreement.

Your payments will be higher the first year of your loan term because you haven’t made your lump sum payment yet. Once you make the payment with the savings from your federal solar tax credit, your lender recalculates your loan terms based on the new, smaller loan balance, benefiting you with reduced payments or a new timeframe for paying off your loan.  

For example, if you take out a $20,000 solar loan with a 20-year term at a 6% interest rate you’ll have monthly payments of about $143 and pay about $14,400 in interest. If you re-amortize that same loan one year later by putting your federal solar tax credit of $6,000 (30% of $20,000) towards lowering your principal balance to $14,000, your monthly payments will drop to just $100 a month and you’ll only pay $10,000 interest.

If you care more about paying less interest over the lifetime of your loan and can afford a higher monthly payment of $155, shortening your loan term from 20 years to 10 years in this case would mean you only pay about $4,600 in interest over a decade, saving you an additional thousands of dollars.

Just like other types of loans, it’s important to keep in mind that the interest rate your lender charges you will depend on certain personal financial factors such as your credit score and debt-to-income ratio, or DTI. So if you’re planning to invest in a solar panel system, it’s prudent to pay off as much debt as you can (like credit cards or a car loan) to make yourself a more attractive loan candidate to lenders.

While many people re-amortize a loan to lower their monthly payments, some solar owners do it to pay off their loan faster. If you choose to shorten your loan term, say from 10 years to five years, then your monthly payments will increase because you have less time to pay off your remaining balance. The benefit of higher monthly payments is that you pay less interest over time, saving yourself thousands of dollars in the process. Plus, you break even on your solar investment sooner and reap more of the financial benefits of going solar years earlier.

Should I finance my solar panel installation?

If you can’t afford the upfront cost, solar financing is a good way to go solar with little or no money down. Whether you pay in cash or take out a loan, the average EnergySage customer breaks even on their initial solar investment in less than 10 years. You can compare solar quotes on EnergySage’s marketplace and evaluate financing options from multiple installers side-by-side to determine which option makes the most financial sense for you.

What is a finance charge on a solar loan?

As with most loans, solar loans often come with fees and additional costs charged to you by your lender. Your interest rate will be determined by factors like your credit score and debt-to-income ratio, or DTI, as well as what’s happening with the economy overall. Interest rates are set by the Federal Reserve and tied to the federal funds rate, which is currently hovering between 5.25%-5.5%, a two-decade high.

Is solar financing tax deductible?

Regardless of what type of solar loan you take out, you’re eligible for the federal solar tax credit, also known as the investment tax credit, or ITC. The ITC lets you claim 30% of your solar installation costs as a tax credit from your federal taxes, saving you thousands of dollars. You may also qualify for state rebates and incentives depending on where you live. If you use a home equity loan to finance your solar energy system instead of a solar loan, you may be able to deduct the loan interest from your taxes. Consult with a tax professional to make sure you qualify for specific incentives depending on your loan type.

You can join EnergySage today for free to connect with installers in your area who offer financing options or work with trusted local solar lenders. Using the EnergySage Marketplace, you can compare multiple quotes as well as financing options. If you want to know which installers near you offer solar financing you can search for lenders in your area on the Marketplace.