Going solar as a first-time homebuyer

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 an excellent 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 deciding to go solar as a first-time homebuyer.

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 think: what's the point in installing solar? While it may make assessing the benefits of going solar a little trickier, installing a solar system is typically 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 an 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–varies by location, the median price for a standalone, single-family home in the United States has crept up above $335,000. 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 in 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.

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, you must consider a few factors about each type of loan before choosing one.

Secured solar loans

Secured loans, also known as second mortgages, may sound enticing because they generally offer tax-deductible low-interest rates. However, you should remember that secured loans also require collateral–typically in the form of your home. If you default on the loan, the lender can repossess your home.

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 can 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 possible with the additional revenue you generate from the added value of your solar system.

Unsecured solar loans

You won't have to use your house as collateral if you choose an unsecured loan. 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 plan on selling your home before you pay off your loan, an unsecured loan might be the right choice. You're still responsible for paying off the remainder of the loan after you move, but you'll have the loan term ranging from five to 20 years. If you default on an unsecured loan, it will likely impact your credit score.

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 want 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.

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 install solar on your next home.

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 when 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 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 check our list of states offering incentives or other alternative policies.

As we've discussed, your payback period will vary based on many factors, including location, how you pay for your solar installation, when you install your solar system, the incentives, 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.

Looking again at our example eight kW system for $25,000 before incentives, we can make a reasonably 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 determining how much you'll save each year in avoided electricity bills. According to the Energy Information Administration (EIA), the national average residential electricity cost was $0.1411 per kilowatt-hour (kWh) in December 2021. We estimate that an eight-kW system typically produces about 12,800 kWh annually (again, variable based on location). Thus, your solar system saves you over $1,800 annually in avoided electricity bills. And since the cost of electricity keeps increasing nationwide every year, you'll 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.

This calculation doesn't consider 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 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 to sell your home in five years, a solar system could 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.

Watch the video below to learn about Tran's experience going solar in Dorchester, MA as a millennial homeowner:

Are solar panels a good investment in 2022?

In most cases, yes. You can quickly 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).

What other incentives or credits do I qualify for with solar?

Getting the ITC depends on your tax liability and when you purchase your solar system. Other incentives usually vary depending on location, as every state and utility company has slightly different options. These incentives can help you reduce your payback period substantially, so check out what's available for you based on where you live.

How do I determine the payback period when getting solar for my first home?

Your specific payback period depends on various factors, including your solar system's exact cost, electricity rates in your area, estimated energy usage, and any incentives or rebates, including the ITC, net metering, and SRECs. Using the calculations in this article, you can calculate your cost and how quickly solar can pay off in your budget.

For competitive prices on solar panel systems, visit the EnergySage Marketplace, where you can get and compare multiple quotes from solar installers. Still unsure 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.