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I hear that with an interest-only home equity loan, the loan payments for solar cost less than my current electric bill. How does that work?

As with any financial plan, the outcome depends on the underlying assumptions. Here are the ones used in the calculations below.

  • The loan has a 4% interest rate. Your itemized federal income taxes put you in the 15 percent bracket, and you owe taxes.
  • You pay $3 per watt for solar, and the total cost of your system is $10,000 before a $3,000 tax credit for a 3.3 kilowatt solar array. It faces south with no shading and produces 4,200 kilowatt hours (kWh) per year.
  • Duke charges 11 cents/kwh for usage above 300 kWh/month (14 cents below 300 kWh) in year 2017.
  • In following years, the variable interest rate changes are comparable to electric rate increases.

Here are the calculations for year one: 

4,200 kWh reduces electric bills by $462 annually or $38.50 monthly.

The value of the electricity generated exceeds the $400 annual interest on $10,000 principal or $33.33 monthly. The difference reduces the loan principal by $62 annually or $5.17 monthly.  $33.33 + $5.17 = $38.50 for loan payment

Income tax is reduced by $60 (15% of $400 home equity/mortgage deduction) = an additional $5/month to apply to reducing the principal.

Net interest cost after taxes = $340 or $28.33 monthly plus $10.17 monthly principal reduction = $38.50 loan payment

$10.17 x 12 months = $122 first year loan principal reduction

Loan principal is reduced by $3,000 income tax credit in year one.

Here are the calculations for year two: 

In year two, $272 annual interest on $6,800 average principal or $22.67 monthly plus $15.83 monthly principal reduction =  $38.50 loan payment

$15.83 x 12 months = $190 second year loan principal reduction

Adjustments that can be applied to principal loan reduction:

  • $40 annual SREC income @ 4 x $10 for 4,000 kWh > a monthly loan payment
  • $40.80 income tax reduction (15% of $272) > a monthly loan payment

Repeat this calculation for each year until the loan is paid off at closing. A buyer can afford to pay more for mortgage payments because of lower monthly electric bills.

Category: Financial Issues

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