How to refinance a solar loan

Understanding solar loan refinancing

Refinancing a solar loan means replacing your original solar financing with a new loan that offers better terms. “Homeowners typically refinance to lower their interest rates, (reduce) their monthly payments or switch from a high-interest solar loan to a home equity loan,” explained Phill Stevens, CEO and co-founder of Avail Solar.

“(To) refinance your solar, you’d likely get a (home equity line of credit) (HELOC),” said Robin Saidov, owner of Your Energy Footprint. Two other solar refinancing routes include cash-out refinancing and home renovation mortgage options.

• A home equity line of credit (HELOC) allows you to borrow against your home equity without restructuring your mortgage. This route can allow you to borrow up to 90% of your combined loan-to-value ratio. It’s ideal if you already have a good mortgage rate you don’t want to change.
• Cash-out refinancing replaces both your mortgage and solar loan with a single new loan. It works best when you can secure a lower rate than your current mortgage and solar loan. Cash-out refinancing usually limits borrowing to 80% of your home’s value and has stricter credit requirements. However, it consolidates your debt into one simple payment.
• Home renovation mortgage options such as FHA 203(k) and HomeStyle Renovation offer higher loan-to-value ratios (up to 97.75%) than other methods. These specialized loans are excellent alternatives if you have limited home equity but want to refinance your solar loan.

How much does it cost to refinance a solar loan?

Refinancing costs vary by lender and loan type. For example, Clean Energy Credit Union charges 1% of the refinanced amount with a minimum fee of $250. Request a complete fee schedule (e.g., application fees, closing costs and origination fees) from your lender before applying so you’re not blindsided by unexpected charges.

» MORE: How much do solar panels cost?

Benefits and drawbacks of refinancing

Refinancing could lower your monthly costs and give you more favorable terms. Many homeowners refinance to consolidate debt or create more breathing room in their budgets.

However, this decision has drawbacks to consider. “One major downside is that you may have effectively brought down your rate through points you’ve already prepaid,” Saidov warned. You lose these prepaid financing costs when you refinance, potentially reducing your overall savings.

“Be cognizant of closing costs and the danger of being stuck with a longer term that means more interest paid total,” Stevens cautioned. While monthly payments might decrease, the total cost over time could be much higher.

The loan type you choose for refinancing also matters. Stevens notes that “some new loans carry additional collateral, putting home equity at risk if (you miss) payments.” Unsecured loans don’t require collateral but often come with higher interest rates.

Here’s a quick overview of the key pros and cons to weigh:

» MORE: Solar energy pros and cons

How to choose the best refinancing option

Choosing the best refinancing option starts with “(considering the) interest rate, loan term and financing fees,” advised Saidov. These three elements determine your monthly payment and total cost over time.

When comparing loan types, home-secured options usually stand out as the clear winners. “Solar panels are considered more risky than home loans, so you’re likely to get better financing terms by adding the cost to your mortgage or getting a HELOC,” she explained.

As you shop around, look beyond the interest rate because closing costs can offset savings from lower rates. For example, a loan with a 5% interest rate but high upfront fees might cost more than a 6% loan with no fees. Similarly, longer terms lower monthly payments but increase the total interest paid, while shorter terms save on interest but require higher monthly payments.

Balancing all these factors can be overwhelming. That’s why Stevens recommends seeking professional guidance. “I always suggest customers compare prospective charges and long-term costs before deciding on refinancing,” he said. “Financial counseling will ensure that refinancing is consistent with (your) objectives and maximizes (you) solar investment return.”

Steps to refinance your solar loan

HELOCs, cash-out refinancing and home renovation mortgage options have specific requirements and application processes. But they follow the fundamental steps below.

1. Gather financial documents: Collect recent pay stubs, tax returns, bank statements and details about your current solar loan. You’ll need these to verify your income and determine your current solar loan balance.

2. Calculate your current loan’s remaining balance: Contact your current solar loan provider for the exact payoff amount. This figure is essential for determining how much you need to borrow. Request a breakdown of any prepayment penalties or fees that might apply when closing your original loan.

3. Compare refinancing options from various lenders: Shop around with at least three lenders to find competitive rates and terms. Compare interest rates, closing costs, loan terms and monthly payment amounts. Credit unions and online lenders often offer different advantages than traditional banks.

4. Apply for the new loan and pass a credit check: Once you’ve selected a lender, complete their application. Prepare for a home appraisal to verify your property’s current value. Lenders will review your debt-to-income ratio, credit report and payment history to determine your eligibility and interest rate. If your FICO credit score is below 650, you may need to improve it by paying down debt before proceeding.

5. Close out your old solar loan: After approval, your new lender will pay off your old solar loan. Request confirmation from both your old and new lenders to verify they’ve completed this transaction properly. Your original loan should show a zero balance and appear as paid in full.

6. Make payments under your new loan agreement: Begin making payments according to your new loan’s terms. Consider enrolling in autopay to maintain timely payments and keep your loan in good standing. Keep all documentation from both loans for your tax records, as certain solar investments may have tax implications.