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.
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