If you just purchased your first home, first of all, congratulations! Buying a home is no small feat and immediately planning your home’s upgrades may feel overwhelming–but we’re here to help! When it comes to solar, we think it’s a great upgrade for first-time homebuyers because solar saves you money in the long run and increases your home value. We’ve laid out some key questions to answer when making the decision to go solar as a first-time homebuyer.
Key takeaways
- If you only plan to live in your home for about five years, a solar system is still probably worth the investment.
- Installing a solar system could increase your new home’s value by 4.1 percent.
- If you plan on moving before paying off your solar loan, an unsecured loan might be the best option for you.
- Install your solar system soon to take advantage of the investment tax credit.
- Your incentives will vary depending on your location.
- Visit the EnergySage Marketplace to get competitive quotes for solar systems.
How long do you plan to stay in your home?
Many first-time homebuyers don’t plan on living there forever. In the United States, the payback period for a solar system is typically seven to eight years, so if you plan on selling your home in five years, you might be thinking: what’s the point in installing solar? While it may make assessing the benefits of going solar a little trickier, typically, installing a solar system is still worth it even if your new home isn’t your forever home.
According to a 2019 analysis by Zillow, investing in a solar installation for your home can increase your home’s value by 4.1 percent. From here, it’s easy to calculate how much of impact solar can have on the value of your home, as well as the portion of your solar costs covered by this benefit: all you need to know is the price of your home and the cost of your solar panel system.
While home value–and thus added home value from solar–vary by location, the median price for a standalone, single-family home in the United States has crept up above $335,000 these days. For the median home, a solar panel system can add about $13,735 to the value of your home ($335,000 home price * 4.1 percent added home value from solar).
Let’s say you plan on installing an eight kilowatt (kW) solar panel system on your home. We estimate that the average cost of an eight kW system is usually between $25,000 – $30,000 before incentives. Thus, you could recoup over 50 percent of that cost when you sell your home, just from the increase to your home value from solar.
These values will vary significantly both based on how much you paid for your home, as well as how much you paid for solar. Check out our article on the cost of solar panels to see the average cost of different solar system sizes.
How does location impact solar system value?
Solar systems increase the value of typical homes in New York, New York by almost $24,000 according to Zillow, meaning that you would actually make money from an eight kW solar system, just on home value alone. In Riverside, California, solar systems increase the home value by almost $10,000, which is closer to the national average for median-valued homes. According to the 2021 Zillow Group Consumer Housing Trends Report, energy-efficient features are important to over two-thirds of homebuyers, so it’s safe to assume the increased home value from solar is here to stay.
How can you pay for solar installation as a first-time homebuyer?
If you just purchased your first home, you may be a bit low on savings, and paying for solar upfront might not be feasible. Fortunately, there are different ways you can finance your solar system installation! Solar loan products are broadly divided into two categories: secured and unsecured. Neither type of solar loan typically requires a down payment, which is good news if you’ve just spent a lot of money on a down payment for your house. However, it’s important that you consider a few different factors about each type of loan before you choose one to go with.
Secured solar loans
Secured loans, also known as second mortgages, may sound enticing because they generally offer low-interest rates that are tax-deductible. However, you should keep in mind that secured loans also require collateral–typically in the form of your home. This means that if you default on the loan for any reason, the lender can repossess your home.
In order to be approved for a secured loan, you’ll usually need significant equity in your home and a favorable debt-to-income ratio, which may be difficult if you’ve just purchased your first home and taken on a considerable amount of debt (i.e., a mortgage). Additionally, if you plan on selling your new home in just a few years, secured loans may not be your best option, unless you’re able to fully pay off your solar loan before you move. Once you sell your home, you’ll have to pay off the remaining balance of the loan, but this is definitely possible with the additional revenue you generate from the added value of your solar system.
Unsecured solar loans
If you choose an unsecured loan, you won’t have to use your house as collateral. However, because the lender is taking on more risk, the interest rates for unsecured loans are often higher and not tax-deductible. Typically, your loan provider won’t charge you interest on the savings you get back from the investment tax credit (ITC), which is explained below.
If you’re planning on selling your home before you pay off your loan, an unsecured loan might be the right choice for you. You’re still responsible for paying off the remainder of the loan after you move, but you’ll have the term of the loan to do so, which can range from five to 20 years. If you default on an unsecured loan, it will likely impact your credit score.
Do you qualify for the investment tax credit?
The ITC allows you to deduct 26 percent of your solar system installation cost from your federal taxes. The ITC is scheduled to remain at 26 percent through 2022, drop to 22 percent in 2023, and no longer be available for residential installations in 2024. So, if you’re looking to install a solar system on your new home, you should do so soon! If we again assume you’re looking to install an eight kW system that will cost about $25,000 before incentives, applying the ITC significantly lowers the cost of your system: a 26 percent tax credit on a $25,000 solar panel system is $6,500 in savings.
Now, let’s say that in 2021, you only have $4,000 in federal tax liability: do you lose that remaining money from the ITC? Nope, you can reduce your tax liability in 2022 by the remaining $2,500. There’s also a possibility that Congress could decide to extend the ITC; if this happens and you decide to move in a few years, you should be able to claim the ITC again if you decide to install solar on your next home.
Does your state offer net metering?
Net metering allows you to send the excess solar generated by your system back to your utility grid. In exchange, you can build up credits, which allow you to draw energy from the grid at night or during other times that your solar panels are underproducing. You only pay the difference between your excess generated solar energy and what you use from your utility (if a difference even exists). If you generate more energy than you pull from the grid over the course of the year, your utility almost certainly won’t pay you for that excess production, which is why it’s important to install a system size that meets your specific needs.
Unfortunately, not all states offer net metering, so be sure to check our list of states that currently offer the incentive or other alternative policies.
What about SRECs?
Some states have markets for Solar Renewable Energy Certificates (SRECs), which are solar incentives that allow you to sell certificates for your energy to your utility. Your utility uses these certificates to comply with any state-level renewable energy targets and policies, such as a renewable portfolio standard (RPS). Not all states have RPS laws or have active SREC markets. You can use the Database of State Incentives for Renewables & Efficiency (DSIRE®) to see what solar incentives are available to you.
What’s your solar payback period?
As we’ve discussed, your payback period will vary based on many factors including your location, how you pay for your solar installation, when you install your solar system, the incentives available to you, and, most importantly, how much you pay for electricity. After all, most people install solar primarily to reduce or offset their monthly electricity bills.
At the top, we pointed out that the typical payback period for a solar system purchased through EnergySage is about seven or eight years. So if you’re only looking to stay in your first home for five years, you still might not be sure if solar is worth the investment.
Taking a look again at our example eight kW system at a price of $25,000 before incentives, we can make a fairly conservative estimate about your payback period. The first step is to calculate the net cost of your solar panel system after incentives: applying the 26 percent ITC reduces the cost of your solar system from the $25,000 you paid upfront to $18,500. If you have other state-level rebates or tax incentives, you can add those in here too.
The next step is to determine how much you’ll save each year in avoided electricity bills. According to the Energy Information Administration (EIA), the national average cost of residential electricity was $0.1411 per kilowatt-hour (kWh) in December 2021. We estimate that an eight kW system typically produces about 12,800 kWh annually (which is, again, variable based on location). Thus, your solar system is saving you over $1,800 annually in avoided electricity bills. And since the cost of electricity keeps increasing nationwide every year, you’ll actually save more from solar each year.
To calculate your payback period, divide the post-ITC cost of your solar by your annual electricity bill savings: $18,500 post ITC cost / $1,800 in bill savings per year = 10.3 year payback period for our average system.
However, this calculation doesn’t take into account the benefit of your increased home value from solar. If you plan on selling your home in a few years, and factor in the $13,735 in the increased home value we estimated above, the net cost of your solar panel system drops to $4,765! It’s important to note again that this value-add is conservative depending on where you live; you could actually pay for your entire solar system just with your increased home value in some areas.
Again, to calculate your payback period, use the following equation:
Payback period = solar system cost ($4,765) / annual savings ($1,800)
…plugging in our numbers, we get 2.6 years! So if you plan on selling your home in five years, a solar system could still save you money! Remember that this number doesn’t account for other incentives that may apply like net metering or SRECs, which would only decrease your payback period and increase your savings.
Common questions from first-time homebuyers considering solar
In most cases, yes. However, you can easily check for your home with our solar calculator based on your roof, electricity bill, and solar incentives in your area to crunch the numbers. Additionally, your return on investment with solar is usually higher than other more traditional investment avenues such as stocks or certificates of deposit (CDs).
Getting the ITC depends on your individual tax liability and when you purchase your solar system. Other incentives usually vary depending on your location as every state and utility company has slightly different options. These incentives can help you reduce your payback period substantially, so make sure to check out what’s available for you based on where you live.
Your specific payback period depends on a variety of factors including your solar system’s exact cost, electricity rates in your area, your estimated energy usage, and any incentives or rebates including the ITC, net metering, and/or SRECs. Using the calculations in this article, you can estimate your cost and how quickly solar can pay off in your budget.
Add solar to your new home through EnergySage
For competitive prices on solar panel systems, visit the EnergySage Marketplace, where you can get and compare multiple quotes from solar installers. Still not sure if installing a solar system is the right option for you? Visit our Community Solar Marketplace to explore solar projects near your new home that could save you money and support local companies.
