How do I purchase and finance a renewable energy system and/or energy efficiency improvements to my house?

Depending on the size and type of renewable energy system you want to purchase, and/or the energy efficiency improvements you want to make to your house, you can use one or more of the following methods to do it:

  • Cash
  • Manufacturer or seller financing
  • Bank or credit union financing
  • Mortgage company financing – generally mortgage financing through FHA or VA

Consumer Energy Tax Credits & Other Incentives

Federal Government: The federal government is offering tax credits for residential renewable energy systems placed in service through December 31, 2016.  The tax credits have the effect of lowering the cost of the system to you, which makes the decision to buy and install a residential renewable energy system even easier.  A tax credit is better than a tax deduction because a tax credit reduces taxes dollar-for-dollar, but a tax deduction only offsets a percentage of taxes owed.  Purchases must be itemized on a federal income tax form.

The federal tax credit for solar energy systems is 30%, and there is no cap.  So if you spend $10,000 on a solar panel, you can get a $3,000 tax credit, which makes your cost $7,000.

The federal tax credit for wind turbines is capped at $4,000.

For more information on the federal tax credits, please see the U.S. Department of Energy web site at www.energy.gov/taxbreaks.htm.

State & Local Governments: In addition to the federal tax credit, many states and/or municipalities offer some type of tax credits, rebates, or other incentives.  You might be able to save a lot of money by spending a little time researching what is offered in your state and city.  North Carolina State University of has done a very nice job of compiling and maintaining a database of local, state, utility and federal incentives to promote renewable energy and energy efficiency.  The database can be found at: www.dsireusa.org.

Local Utility:You should also contact the customer service department of your local utility company to find out about the rebates, credits or other incentives they offer. They may require that you use a contractor from a pre-approved list, and have the contractor complete and sign specific forms before you can receive an incentive.  Know their requirements before you make your purchase.  Some utility companies have set up training and certification programs for local contractors to install renewable energy systems.

Another great incentive is if your monthly payment on the renewable energy system loan is less than your monthly energy savings, then your system is essentially free since the energy savings pay for the system.

In fact, energy service companies have been set up to finance and install renewable energy systems and/or energy efficiency improvements in commercial and industrial buildings.  The energy service companies share the energy savings with the property owner.  The property owner gets lower energy bills without a capital investment, and the energy service companies receive a share of the monthly energy savings and can receive tax credits and rebates.

Cash
If you have the ability to pay cash for a renewable energy system, that’s great.  The right system, properly placed and installed, might provide a higher and more consistent return on your investment from monthly energy savings than could be obtained from investing the same amount of money in a CD, money market account, savings account, or other similar investments.

Manufacturer or Seller Financing
Some solar panel manufacturers and wind turbine manufacturers offer attractive financing to purchase their systems.  Other manufacturers have programs with selected lenders, who are familiar with their particular solar energy equipment or wind turbines, that provide financing for their systems.  When you’re talking with the manufacturers, ask them about any financing programs they may have and incorporate the benefits of the various financing programs into your decision about which system is the best one to buy.  But remember, attractive manufacturer financing should be only one of the considerations of which system to buy.

Bank or Credit Union Financing
Your local bank or credit union may offer very competitive financing for residential renewable energy systems.  It is well worth spending a little time to find out what they may offer, and what their requirements are, because you might obtain a better rate and lower monthly payment than with manufacturer financing.

When discussing possible financing with your bank or other lender, make sure they understand it is a home improvement investment that should largely or completely pay for itself through anticipated energy savings.  If you are are talking with the bank about a renewable energy system purchase, it might be a good time to ask about financing for any energy efficiency improvements you’ve been considering and roll those costs into the loan as well.

Mortgage Company Financing
If you already have a mortgage on your house, you’ll need a second mortgage from a lender that specializes in second mortgages to finance your system or you’ll need to refinance your mortgage and add in the costs of your system and energy efficient improvements.

Loans for renewable energy systems and energy efficient improvements are actually fairly straight forward for a lender to process and underwrite.

FHA and VA both offer energy efficient mortgages.  The mortgages allow borrowers to roll 100% of the expenses of cost-effective energy improvements into their FHA or VA home loans.  An appraisal or additional down payment is not required, and the borrower does not need to re-qualify.  Energy efficient loans can be used when purchasing a house or when refinancing a house.

Some conventional (FNMA – Fannie Mae and FHLMC – Freddie Mac) loan programs also allow energy efficient improvements.  When obtaining a loan to buy a house, you can include the actual costs of the proposed energy efficient improvements in the purchase price up to an amount equal to 15% of the property value. Energy efficient improvements can include: insulation, weather-stripping, caulking, energy efficient doors and windows, energy efficient heating and cooling systems, etc.

Energy efficient mortgages allow borrowers to roll the cost of their energy efficient improvements into the loans, and add their estimated monthly savings in energy costs to their qualifying incomes. A higher qualifying income can help a borrower obtain a larger loan. Adding the cost of the energy efficient improvements to the loan allows the cost to be paid off over time instead of upfront. Monthly energy bill savings from the energy efficient improvements can exceed the increase in monthly mortgage payments from adding the energy efficient improvement costs into the loan.

More detailed information about FHA and conventional loan financing of energy efficient improvements and/or renewable energy systems, including loan limits and guideline requirements, can be found at a very informative website hosted by the Florida Solar Energy Center, a research institute of the University of Central Florida at:

www.fsec.ucf.edu/en/consumer/buildings/homes/ratings/eem/

Investments in energy efficient improvements and/or renewable energy systems are the only improvements you can make to your house that will both add value to your house, and should pay for themselves during their use.  For an explanation about calculating your payback period and return-on-investment (ROI), please see the attached page: System Cost Payback Period.

To calculate how much you’ll pay each month for the energy efficient improvements and/or renewable energy systems, you can go to a mortgage calculator site like Mortgage Calculator and enter in the correct information for a quick answer.  You can also go to the attached Factor Table to help you calculate the approximate monthly payment.

If you financed $25,000 for energy efficiency improvements and a renewable energy system for your house over a 30 year period at 5.50% interest, your monthly principal and interest payment would be $142.  But if those energy efficient improvements and renewable energy system saved you, say, $170 a month in utility bills, they would effectively cost you nothing!

About the Author

Mark H. Witte is a strong proponent for energy efficiency and renewable energy, and believes individuals should have more control over how the energy for their homes is produced.