solar loan re-amortization

Solar loan re-amortization: an overview

Solar loans have become a popular way to finance solar panel installations. While there are various loan options to consider, the majority of solar loan products offer fixed interest rates, monthly payments, and terms. If you’re looking for a solar loan option that allows you to adjust your monthly payment down the line, you may want to consider re-amortization options.

Disclaimer: This article is intended to provide an informational overview of the solar loan fees for interested homeowners. It is not intended to serve as official financial guidance. If you’re interested in installing solar products, make sure to use your best judgment and seek advice from a licensed professional before making any purchase or investment.

Key takeaways

  • Amortized loans have a fixed monthly payment and terms, whereas a re-amortized loan is one where you pay a lump sum and your payments reduce after that lump sum payment.
  • Some solar lenders use re-amortized loans to coincide with anticipated investment tax credit (ITC) payments, but an ITC payment isn’t guaranteed and depends on your individual tax situation.
  • You’ll want to check all of the fine print to understand exactly what you’re paying if you finance solar, including terms, payment amounts (and if those change), dealer or loan fees, and if your lender is accounting for an ITC payment in any of the amounts.
  • Sign up for a free account on the EnergySage Marketplace to compare solar quotes, including financing options, from top lenders.

What’s in this article?

What is an amortized loan?

You may have heard of an amortized loan before, as many common loan types (car, home, educational, etc.) fall into this bucket. With an amortized loan, you have both a fixed repayment term and monthly payment. As you continue to pay your monthly dues, the money is split between the principal amount financed and the interest rate payments that you owe. Because your interest payments will change based on what’s remaining of your principal loan amount, the amount allocated to interest payments versus principal will change each month even though your fixed monthly payment remains the same. With amortized loans, you can make early payments and reduce what you owe overall, but your required monthly payment amount remains the same for however long it takes to pay off the loan entirely.

What is a re-amortized loan?

When your loan has a re-amortization option, there’s one important distinction compared to traditional amortized loans: you have the opportunity to pay down your loan with a significant lump sum and change your monthly payments for the rest of your repayment term. 

How to calculate your solar loan repayment

Here’s an example of how to calculate your loan repayment: you make a monthly payment of $200 on your 10-year loan. You then pay a lump sum of $10,000 after your first year and re-amortization occur. So, you only need to pay $96 a month for the remaining nine years of repayment.

Re-amortization calculations can be complicated, as your new monthly payment will depend on the remaining months in your term, your principal balance, and your interest rate. However, there are many free amortization calculators online you can use to input your remaining principal loan amount, interest rate, and the number of monthly payments left to calculate your potential monthly post-lump sum loan payment.

Can re-amortization result in higher monthly payments?

Remember to read the fine print of solar loan documents before signing. A few solar lenders offer the reverse of what’s described above: you start with lower monthly payments and if you don’t pay off a set portion of your loan by a specific date, then your monthly payments may increase. If this is the case, confirm with a tax advisor that you can claim the full ITC credit in your first year so that you can use that credit to pay down your loan and avoid higher monthly payments.

Considerations with solar loan re-amortization

Solar lenders and their loan options are unique, and one re-amortization option may not have the exact same terms as another.

While many solar lenders allow you to re-amortize once for free, others may require an additional processing and administrative fee. Additionally, your solar loan may require a minimum payment amount in order to re-amortize. For example, they may require a minimum lump sum of at least $10,000 in order to re-calculate your monthly loan payment. Some solar loans may have a set time frame in which you have the opportunity to re-amortize your loan. If this restriction exists, it’s typically by month 18 as financiers assume you will have filed for taxes within this timeframe, thus realizing the benefit of the federal ITC. 

Additionally, the ITC isn’t something that’s guaranteed – it’s a tax credit, so depending on your individual tax situation, you may or may not be eligible. While many Americans claim the ITC every year, that’s something you’ll want to consult with your CPA or tax advisor about to confirm. 

The bottom line: it’s important to read all loan documents thoroughly before signing to know your terms, payment amounts, and any solar loan fees, whether you’re looking to re-amortize your loan in the future or not.

Advantages of solar loan re-amortization

One reason re-amortization is popular with solar financing is because of the federal investment tax credit (ITC). With this incentive from 2021, you can claim 26 percent of the cost of your solar panel system as a credit when filing your taxes. From 2022 until 2032, you will be able to deduct 30 percent from the cost of your installation.

If you go solar early in the year, you won’t realize the benefit of tax credits for a few months because you have to wait until you file your tax return to claim the incentive. So, if your solar loan has a re-amortization option, you can pay off some of your principal loan balance with what you later reap as a tax credit, thereby lowering your monthly loan payment. Plus, if the combination of your monthly loan payment and electric bill is less than your electric bill prior to going solar (which is often the case!), you’ll see immediate savings. Many solar loans that include re-amortization options are unsecured, meaning it doesn’t require a lien on your property. As an added bonus, the approval process for unsecured loans tends to be quicker than for secured loan alternatives.

Frequently asked questions about solar financing

Should I finance my solar panel installation?

If you’re able to pay cash for going solar, you’ll avoid paying interest and any dealer or origination fees (meaning your return on investment will ultimately be greater). However, buying and installing solar panels is costly (even though you save money over time and usually pay back your initial solar expenses in just about 8.7 years). So, financing solar is a good way to go solar with little or no money down. You can compare solar quotes on EnergySage and easily request financing options from the installers providing you with quotes to see what makes the most sense for you.

What is a finance charge on a solar loan?

Your finance charge or interest rate on a solar loan will vary depending on a few factors including the type of loan (secured or unsecured), your credit score and current debt, and the current U.S. Federal Reserve (the Fed) rate. Your annual percentage rate for solar may be approximately 4 – 5 percent. You’ll also want to make sure you understand any payment terms, if payments change over time, and any solar loan fees you’re paying.

Is solar financing tax deductible?

That depends. You can sometimes claim the interest of your solar loan as a “capital investment” to your home if you itemize deductions for your federal taxes. Of course, you’ll need to check with your CPA or a tax professional to confirm based on your individual situation and tax filing and confirm the most up-to-date IRS guidelines. Separately, adding solar panels to your home (whether you pay cash or with a loan) does qualify you for the investment tax credit (ITC), also known as the federal solar tax credit, which allows you to deduct 26 percent of your solar installation costs from your federal taxes.

Find the best solar financing on EnergySage

You can easily join EnergySage today for free to get connected with installers in your area who offer financing options or work with trusted local solar lenders. Through your EnergySage account, you can compare multiple quotes as well as financing options. Just curious who offers solar financing near you? You also search for lenders in your area.

This article was originally posted in April 2019 and has been updated.