Solar Panels Can Cut Your Utility Bills. Here’s What to Know Before Investing in Them

A photo to accompany a story about financing solar panels Cavan Images/Getty Images
We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

In the final quarter of 2020, the price of solar panels dropped to historic lows. 

No wonder nearly half of U.S. homeowners have considered installing panels on their homes, according to  a recent survey from Pew Research Center.

It pays to think ahead when deciding if residential solar is right for you. Ideally, switching to solar should not cost more than your electricity bill, experts say. And since solar panels are quickly becoming affordable for average homeowners, it’s a practical project to consider. 

Solar panels use photovoltaics (PV) to harness sunshine and turn it into electricity. Having a solar system in place helps to reduce the carbon in the atmosphere, which ultimately protects our environment. Solar panels can save homeowners money on utilities, and specialized solar loans exist for this purpose. Tax credits are also available.

Pro Tip

To make residential solar as affordable as possible, enter your ZIP code here to see local solar tax incentives in your state.

So how much do solar panels cost, and should you invest in residential solar? Keep in mind, the amount of money you can save by switching to solar depends on how much electricity you use and what financing you decide to go with. Here’s what to consider.

How Much Do Solar Panels Cost?

The price of a residential solar system has halved over the last decade. Today, the average cost of a residential system is $20,000, according to the Solar Energy Industries Association, a national trade association.

However, the size of the system you’ll need in order to provide enough power depends on the individual and the home. One of the main factors is how much electricity you use each month. Your location also plays a big role in the cost.

Say you live in a region with high exposure to sunlight; you won’t need as many panels. If you live in a cloudy region with less sun, you’ll generally need more panels to get enough electricity each month.

“It really depends where you’re at. If you’re in the Northeast, it’s going to be really different than if you’re in Arizona,” says Terri Mickelsen, CEO of Clean Energy Credit Union, a financial institution.

Best Options to Finance Solar Panels

Many homeowners finance their home solar system. You have a few options for residential solar financing.

Solar loan 

This is a loan from a lender who specializes in financing residential solar projects. Many of these loans are unsecured, so you shouldn’t have to use your home as collateral. But make sure to understand the loan’s fees and terms so you don’t end up paying more than what the solar system will save in energy costs. 

Traditional loan

Some homeowners choose traditional loans to finance their solar system. A couple options to look into are a home equity loan or a home equity line of credit (HELOC). These loans are generally secured by your house.

HomeStyle Energy Mortgage by Fannie Mae 

This program lets you use up to 15% of your home’s assessed property value — either for a new mortgage or a cash-out refinance — to make energy saving improvements on your home, which includes residential solar systems. 

Solar leases and power purchase agreements

If you don’t care about owning your solar system, you might be able to fund your home solar installation with little or no money down. 

“Options include leasing panels or entering into a power purchase agreement, where the solar company owns the panels and the customer buys the system’s solar power at a set price. Neither of these options come with tax benefits. However, in many cases, the homeowner can still save money right away,” says Becca Dr. Jones-Albertus, Director of the U.S. Department of Energy Solar Energy Technologies Office.

How Much Money Can You Save by Going Solar?

Again, the amount of money you can save by switching to solar depends on how much electricity you use every day and what financing you choose. In general, a good rule of thumb is that loan payments for the solar system should not exceed what you would pay for your monthly electricity bill. 

Make sure to talk through the loan with your bank or lending institution. Having a full understanding of what the solar system can do ensures it will be a cost-effective tool for powering your home.

Careful planning with solar systems is key. If your home needs other repairs, then it could make sense to roll the cost of the solar system into the total expense of the home improvements. 

“Think about how soon you need to replace your roof — because some solar and roofing companies have partnerships that allow you to save money if you do both together,” says Dr. Jones-Albertus.

What Are the Tax Benefits?

The Solar Investment Tax Credit (ITC) is offered by the U.S. government nationwide for people to build residential solar systems. The ITC provides a 26% tax credit for systems installed before 2023. After 2023, the ITC provides a 22% tax credit. The ITC will expire starting 2024 unless Congress decides to renew it. 

Homeowners can use this tax credit to offset the cost of expenses like solar panels, energy storage devices, contractor labor costs, and solar system equipment such as wiring and mounting equipment. 

“Speak with a tax consultant prior to putting solar panels on,” advises Mickelsen.

There are restrictions to how the ITC can be used by homeowners, and transferring solar system costs into tax credits definitely takes some know-how. 

“It’s not extra money you get where the government cuts you a check. ITC credits are based on taxes that you’ve paid in. So if you don’t have tax liability, it could take you years to get that money back—or you may not get it all back,” says Mickelsen.

Aside from the federal solar tax credit, many states provide local tax incentives designed to help make solar systems more affordable. 

“The DSIRE website is a great resource to look for state incentives and tax breaks,” says Dr. Jones-Albertus, referring to the Database of State Incentives for Renewables and Efficiency. By entering your ZIP code, you can find a full list of financial incentives and regulatory policies. 

Check out the DSIRE database to see what kind of solar tax incentives exist in your state.

Conclusion

Thinking ahead about the financial benefits of getting solar panels is important before investing in them. Have a clear idea of how much electricity you need, and research the solar tax incentives you can use in your state.

“Do your homework to make sure you’re getting the best deal,” says Mickelsen.

Just like when shopping for anything else, make sure to understand the market well. Different lenders offer different terms with solar financing. Shop around until you find terms that work for you.