A solar loan and a solar lien are tied together largely because one cannot exist without the other. Therefore, in order to understand what a solar lien is and how it affects your property, we must look at what a solar loan is and how it relates to a solar lien.
Solar Loan and Solar Lien – How Do They Correlate
What Is a Solar Loan?
Going solar offers countless benefits to both commercial and residential property owners and therefore makes good financial sense. Your solar energy system can completely or partially eliminate your utility bill, so you’ll never have to worry about the annual increments in the electricity costs.
However, solar panels don’t come for free, and nor are they what an average homeowner would consider being affordable. An average American homeowner would require a 5kW or a 6kW system which would cost somewhere between $10,000 to $13,000 after factoring in the federal tax credit. Keep in mind that the quoted value is just an average and will vary from state to state.
Nevertheless, it is uncommon for a homeowner to have such a large amount casually stored in their bank account and so securing a solar loan is the only way most American homeowners can go solar.
Solar loans are highly specific loans that a lender offers you for the sole purpose of helping you finance the installation of a solar panel system. Many solar panel providers give you the option of POS (point-of-sale) financing in the form of a secured loan, which works similarly to home mortgages and car loans in that you must guarantee an asset as collateral.
In the case that you are unable to keep your end of the bargain by defaulting on your payment, your lender will have the legal right to take possession of your solar system and use it for themselves or sell it on the market. A plus point of secured loans is that they often have lower interest rates compared to unsecured loans, but then unsecured loans have the added benefit of not requiring collateral.
What is a Solar Lien?
By definition, a lien is a legal standing or claim that a loan creditor has over your assets that were pledged as collateral to satisfy the loan. A lien can be established by a lender or a judicial judgment. A lien is used to secure an underlying commitment, such as debt repayment. The creditor may be entitled to seize the asset that is the subject of the lien if the underlying obligation is not met.
A lien gives a lender the legal authority to seize and liquidate a borrower’s collateral item or asset if they default on a loan or contract. Furthermore, without the approval of the lienholder, the owner cannot sell the asset that is subjected to the lien. A lien against inventory as well as other unfixed goods is known as a floating lien.
A lien on a piece of land for a loan, for instance, can be optional or consensual. Involuntary or statutory liens, on the other hand, exist when a creditor files for legal action against nonpayment. Because of this, assets such as real estate and bank accounts can be subjected to a lien.
Solar liens work in the same way as a lien on any other asset does. When you apply for a solar loan, you will have to pledge your solar panel system as collateral. This means that your solar panel system will be subject to a lien, and if you fail to make the promised payment, the lender will have the legal authority to seize your system and use it as they like.
Knowing this, one can clearly begin to see the correlation between a solar loan and a solar lien. It is only when you borrow a secured loan from a lender that a lien will be placed on your solar panel system.
Will Investing in Solar Result in a Lien on My Home?
When you borrow a solar loan to finance the installation of a solar panel system on your property, you authorize the lender to file a Uniform Commercial Code-1 (UCC-1) statement. The authorized UCC-1 has to be registered with the Secretary of State (SOS) and the jurisdiction where your solar property is situated.
The file is open to the public and may be accessed on your SOS and county’s websites, allowing your lender to publicly declare their right to repossess your asset provided that you default the agreed payment. However, as explained above, when borrowing a solar loan, it will be your solar panel system that will be subjected to the lien and not your home.
In a nutshell, investing in a solar panel system by securing a solar loan will not put a lien on your home but on your solar panel system. However, there is still an underlying downside to a solar loan. If a mortgage lender who is inexperienced with UCC filings or solar financing runs a standard lien check on your property, they might mistake the filing related to your solar equipment as a lien on the property and immediately stop the buyer’s house loan.
Moreover, while a standard solar loan will not put a lien on your home, there are other types of loans that might, such as a home equity line of credit (HELOC), more commonly referred to as a home equity loan.
The equity on your home can be calculated by subtracting the mortgage you owe from the current market value of your home. For better understanding, a higher property value coupled with a low mortgage means higher equity and vice versa.
Many people view their equity as untapped reserves of capital and leverage it in the form of collateral to secure loans. If you have equity on your home, you can use it as collateral for a home equity loan and finance your solar panel system.
A significant benefit of a home equity loan is that it offers lower interest rates. On the other hand, however, since the loan or line of credit is secured on the basis of your property, you run the risk of losing it if you default on the loan.
How to Get Out of a Solar Loan
There are only two ways to get out of a solar loan. The simplest way, which, ironically, might also be the most difficult one, is to pay off the solar loan yourself. Installing solar panels on your home will increase the resale value of the property. According to Zillow, solar homes tend to go for 4.1% higher and also sell faster than non-solar homes. When selling your home, you can leverage this value increase to pay off the solar loan.
The second approach is to have the new buyers assume your solar loan. This will perhaps require some convincing on your part. Additionally, the new buyers must also qualify for taking up the loan. Once this is done, the new homeowners will then continue the loan payments while you can move into your new home debt-free.
Buying a House with Solar Panels Already Installed
Going solar is not just a good move for the environment but is also a good financial investment that will benefit the owner greatly. Knowing this, it comes as no surprise that more and more home buyers are looking for homes that already have solar panels installed on them.
However, before you proceed with closing a deal on a solar home, there are a few questions you should ask yourself to decern if the solar system installed on the property is worth the extra cost.
Are the Solar Panels Owned or Leased?
The status of the ownership of the solar panels is a major factor in determining whether or not the price of the home is justified. Generally, a home with a leased system would be less valuable than a home with an owned system.
In the case of a lease, the system is not owned by the homeowner but by the solar company. Power purchase agreements are similar to leases, both entailing the same thing. The homeowner enters an agreement with a solar installer that involves the homeowner purchasing electricity from the company at a lower rate than the utility rate, and the solar firm installs solar panels on the home for little or no upfront investment.
Purchasing a home with a leased solar system can be a challenging situation, one that necessitates extreme caution on the part of the potential homebuyer. The buyer must agree to take on the lease or PPA in order for the transaction to be finalized; otherwise, the seller will have to get the solar panels uninstalled, usually at a hefty price tag.
Seeing as how with a leased solar panel system, you’ll lose the system unless you renew the lease, one can see why homes with a leased system value less than homes with owned systems. Needless to say, the best possible scenario would be if the solar system was fully paid for by the seller.
How was the System Financed?
In the case of a home that has an owned solar system, you must find out how the purchase was made. In the case of a solar loan, you might have to assume the solar loan; in doing so, take up the responsibility of making monthly payments until the loan is fully paid off.
Furthermore, if the system was purchased through a solar loan, you should determine what type of loan was used since each solar loan type may have its own underlying terms and conditions. For instance, a secured solar loan, as explained above, will subject the solar system to a solar lien.
PACE financing is another possibility that a homeowner in the states of Missouri, California, and Florida can opt for. Under this program, the homeowner holds the ownership of the solar panels entirely and pays for the system over time through an increment in their property tax assessment.
As a homebuyer, you should be familiar with the terms and conditions of the PACE agreement, such as the annual assessment fee and also the number of remaining years.
Is Net Metering Possible?
Net metering is a system that allows you to sell any excess solar energy that your solar panel system generates to the grid. This helps you save or even earn money. However, depending on which state you live in, this option might or might not be available to you as only a few specific states have authorized net metering.
So, if you’re located in a state where net metering is permitted, you should check whether or not the solar panel system on the home you’re interested in has accommodations for supporting net metering.
Frequently Asked Questions (FAQs)
Are Solar Loans Unsecured Debt?
Solar loans can be divided into two main categories: secured solar loans and unsecured solar loans. The primary difference between the two is that secured solar loans require the borrower to put up an asset of theirs as collateral, whereas unsecured loans do not.
What Is an Unsecured Solar Loan?
Unsecured loans do not require the borrower to put up an asset as collateral. However, these loans do come with a higher interest rate than secured loans and usually have a repayment period between two to seven years. Furthermore, obtaining an unsecured loan requires a good credit score. Additionally, the better your credit score is, the lower interest rates you’ll get on the loan.
What Happens If You Default on a Solar Loan?
If the solar loan was a secured type, then there will likely be a lien on your solar system, and so the lender has the legal authority to seize and repossess your system.
Are Solar Loans Considered Tax Deductible?
Yes, provided that the loan is secured by your home, the solar loan will be factored in as tax-deductible. This is owing to the fact that home upgrades such as the installation of solar panels are classified as capital projects by the IRS, which means they raise the value of the house and are thus tax-deductible.
Are Solar Loans Worth It?
Generally, solar loans are indeed worth it due to the many benefits that solar panels offer, such as increased home value and savings on the electric bill, which outweigh the disadvantages of a solar loan.
Solar loans and solar liens can seem a bit problematic, seeing as how they can make selling your home and getting mortgages a tad bit more difficult due to the prevalent misconception that a solar loan will put a lien on your property. However, with the increased popularity of solar technology and with solar loans becoming increasingly common, these misconceptions are being cleared, and people are becoming more welcoming of solar loans and the technology as a whole.
The team at Solar Medix is ready to answer your questions and give you a no-obligation price quote. Feel free to call us at 732-785-4814 or book a consultation online. And we’ll get in touch within 24 hours.