Solar financing comparison methodology

The five financing structures and incentive capture

The most consequential variable across financing structures is not the interest rate — it is who captures the incentives. State income tax credits and SREC revenue can represent 15–55% of system cost in high-incentive states. Here is how that plays out across all five structures:

1. Cash purchase

The homeowner pays the full system cost upfront and owns the system immediately. All incentives accrue to the homeowner:

• State income tax credit (where applicable)
• SREC registration and revenue (where applicable)
• Utility rebates payable to the system owner
• Property tax exemption on added home value

Cash purchase produces the highest 25-year NPV in nearly every scenario because there is no financing cost eroding returns. The constraint is capital — most homeowners do not have $20,000–$45,000 liquid to deploy upfront.

2. Solar loan — secured (HELOC or home equity loan)

The homeowner borrows against home equity to buy the system and owns it from day one. Incentive capture is identical to cash purchase. The additional consideration: HELOC interest may be tax-deductible under IRC §163(h)(3)(B) when proceeds are used for a qualified home improvement — and solar installation qualifies. Home equity loan interest carries the same deductibility when the loan is used for home improvements. This deductibility is itemized (Schedule A), so it only generates actual tax savings for households that itemize rather than taking the standard deduction.

Secured loans typically carry lower interest rates (prime + 0.5–2%) than unsecured solar-specific products, but they require available home equity and their approval process involves an appraisal or automated valuation. They also encumber the home with a lien, which must be disclosed and typically paid off in a home sale.

3. Solar loan — unsecured (GoodLeap, Mosaic, Sunlight Financial)

Unsecured solar loans from specialty lenders have become the dominant solar financing product, originating roughly 50% of all financed residential solar in 2024 (EnergySage). The homeowner owns the system and captures all incentives — same as cash and secured loan. There is no home equity requirement and the approval process is faster, but interest rates are higher: typically 5.99–9.99% for 12–25 year terms depending on credit score. Interest is not tax-deductible because the loan is not secured by a qualified residence.

Importantly, unsecured solar loans do not create a lien on the property title, which means they do not require payoff at home sale (though they remain a personal debt of the borrower). This distinguishes them significantly from PACE loans, described below.

4. Solar lease

A third-party company owns the system. The homeowner pays a fixed monthly lease payment — typically $80–$200/month for a 10 kW system — and receives a lower electricity bill than they would pay without solar. The installer captures all state incentives and SREC revenue. The homeowner does not receive a state income tax credit, does not receive SREC income, and cannot claim the property tax exemption on the added value of equipment they do not own.

Leases run 20–25 years with escalation clauses on the monthly payment of 0–2.9% per year (EnergySage Solar Marketplace Report 2024). End-of-term options typically include system purchase at fair market value, free removal, or lease extension. Home sale implications are significant: the buyer must either assume the lease (requiring credit approval) or the seller must arrange a buyout, which can delay or complicate closings.

5. Power Purchase Agreement (PPA)

A PPA is structurally similar to a lease for purposes of ownership and incentive capture — the installer owns the system and captures all state credits and SREC revenue. The pricing difference: instead of a fixed monthly payment, the homeowner pays a per-kWh rate for electricity produced, typically 10–30% below the local utility rate with its own escalation clause. The per-kWh rate provides some natural hedge against underperformance (you pay less if the system produces less) but the installer also benefits if the system outperforms expectations.

PACE loans: a critical caveat

Property Assessed Clean Energy (PACE) loans are a financing structure unique to solar (and other home improvements) where the loan is attached to the property itself rather than to the borrower personally. Repayment is collected through the property tax bill. PACE loans are available in California, Florida, and Missouri for residential use, and in more states for commercial use.

The critical risk: PACE loans typically have super-priority lien status — meaning they are repaid before the first mortgage in the event of foreclosure. This creates a serious complication for home sales and refinancing. Many conventional mortgage lenders (Fannie Mae, Freddie Mac) will not lend on properties with outstanding PACE liens, which can make a home unsellable to buyers seeking conventional financing. The CFPB has issued guidance warning homeowners about PACE loan risks, and California enacted additional consumer protection requirements in 2022.

The Solar Math Pro calculator models PACE loans as a secured financing option with a prominent disclaimer about lien priority and mortgage compatibility. We do not recommend PACE financing without the homeowner confirming compatibility with their existing mortgage lender and any prospective buyer's financing.

25-year cost comparison methodology

The calculator produces a side-by-side NPV comparison across all five structures plus a baseline (no solar, continuing to pay utility bills). The comparison is always on a present-value basis:

25-year total cost (each structure) =
  NPV of all payments (loan, lease, or PPA payments)
  − NPV of electricity bill savings
  − NPV of incentives captured (structure-dependent)
  + NPV of inverter replacement (if applicable)

25-year cost of doing nothing (baseline) =
  NPV of 25 years of utility bills at 2.8%/yr escalation
  (the cost of staying on the grid without solar)

Decision metric:
  Best structure = lowest 25-year total cost
  (or highest NPV if framed as investment return)

All cash flows are discounted at 7% real, consistent with NREL's recommended residential discount rate. Incentives captured in Year 1 are applied at full face value (no discounting, since they occur in Year 1 or Year 0). SREC income is discounted by year of generation.

Interest rate sensitivity: how much it matters

Solar loans vary widely in rate. A 2 percentage point difference in interest rate (e.g., 5.99% vs. 7.99%) on a $25,000 solar loan over 20 years changes the total interest paid by approximately $5,000–$8,000 — which directly erodes NPV. The calculator surfaces an interest rate sensitivity table showing NPV across the full range of available solar loan rates for the entered system cost, so the homeowner can see exactly how much each 0.5% difference in rate is worth before accepting a financing offer.

The HELOC vs. unsecured solar loan decision is often the highest-value financing decision a solar buyer makes. The decision tree:

• Available home equity? If yes, compare HELOC rate to solar loan rate. The HELOC is typically 1–3% lower in rate, and interest may be deductible. Advantage: HELOC.
• Do you itemize deductions? If not, the deductibility advantage of HELOC disappears. The rate differential alone must justify the complexity and lien implications.
• Planning to sell within 10 years? A HELOC must be paid off at closing; an unsecured solar loan does not. For shorter holds, the HELOC payoff obligation may negate the rate advantage.

Named-expert guidance

Limitations

• HELOC interest deductibility requires itemizing on Schedule A and is subject to the $750,000 mortgage interest deduction cap under current law; consult a tax professional before assuming deductibility.
• PACE loan availability varies by county and lender; confirm program availability and mortgage compatibility before proceeding.
• Lease and PPA terms vary significantly by installer; actual escalation rates, production guarantees, and buyout prices may differ from the assumptions modeled.
• Incentive capture rules are based on current law and program structures; state legislatures and utilities can modify incentive programs after installation.

Primary sources

• IRC §163(h)(3)(B) — home equity loan interest deductibility for qualified home improvements
• NREL PVWatts (pvwatts.nrel.gov) — production estimates used in all NPV calculations
• EIA Form EIA-861 — utility rate data used in 25-year cost modeling
• EnergySage Solar Marketplace Report 2024 — financing market share data, lease escalation rates, quote comparison statistics
• CFPB PACE Loan consumer advisory — PACE lien priority and consumer protection guidance
• SolarReviews consumer survey data (2024) — PACE comprehension statistics