# pay off morgage or get solar panels, what's most economical?

Solar Expert Posts: 834 ✭✭
I'm paying about 5.75% interest on home mortgage.
I'm trying to calculate if the return on a solar panel investment would be better than paying down mortgage.
I went to:

http://bpsolar.cleanpowerestimator.com/default.aspx
Looking at my electric bill for the last year I used 26500 kwh last year or \$2819 of electricity at 10.6cents a kwh. Average monthly bill is \$234.
Also plugged in the following:
\$230/month electricity bill
4kwh solar panel system
\$6/watt installed cost (not accurate closer to \$3/watt since I would install so I fixed the output below to reflect cost of \$3/watt).
3% annual electricity increase

Results were
Estimated System Cost \$12,000
Federal / State / Local Tax Credits \$6000
Net Cost \$6000
Cumulative Lifetime Savings \$20,571 over 25 years
Investment Return 3.7%

The price for this system was adjusted since I will install myself. about \$6000 after tax credits.
but used roi calcuator at
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Current Principal: \$ 6000
Years to grow: 25
Interest Rate: %3.6
Compound interest time(s) annually 12
Make additions at start end of each compounding period
Results
Future Value: \$ 14,737

\$14,737 plus \$6000 equals about the \$20,500 the system save me according to the solar calculator.

However I would also get srecs
SERC \$31x 5.4Mwh = \$167 per year
\$167 per year x 25 years at say 3% interest is around \$6,000 so that would pay off the depreciated and quite possibly useless panels 25 years down the road.

Doing the calculations one more time:
Current Principal: \$ 6000
Years to grow: 25
Interest Rate: %5.1
Compound interest time(s) annually 12
Make additions at start end of each compounding period
Results
Future Value: \$ 20, 807

investment return only 5.1% per year, vs 5.75......probably better to pay off mortgage buy amount is not really that big of a deal.
«1

• Solar Expert Posts: 122 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

A few things to think about

Your mortgage interest may be tax deductible, so this could reduce our effective tax rate.

The Money you save on your electric bill is tax free, as money saved is money earned.

Inflation will increase your electric savings and decrease your mortgage over time.

You might be able to refinance you mortgage and get a lower rate.

If you are self employed or can sell srecs, you will also get some depreciation.
• Solar Expert Posts: 481 ✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

SolarLurker has hit all the main points, I think.

One thing to keep in mind is that solar PV will continue to get cheaper - the SunShot Initiative is aiming to get the installed price down to \$1/watt by 2020.

As prices decline, so will tax credits and rebates.

Anyway - based on current numbers - it looks to me that your PV install today will net a better return than paying off your mortgage - assuming no substantial repair costs are incurred. Keep in mind that inverters are typically warranted 10-15 years - and what happens if your panel manuf goes out of business?

Of course - all of this ignores the other benefits of PV - clean power!
• Solar Expert Posts: 123 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

If you had no mortgage, you could watch for the best PV equipment prices and build a system, cash, with the money you'd have put into house payments.

It's been my experience, too, that if a person is "going PV" and figuring out return on investment, he's probably not gonna be so happy. Not that PV isn't a good investment, but if you're doing it simply to hope to save money on the cost of electrical usage, you might be unhappy.

I tell people who visit us, and are interested or even amazed at our off-grid system, that if they want to go solar, they need to do it because they want to. If they save money or come out ahead [compared with grid-supplied power], fantastic. If they don't really come out ahead, who cares.

With no mortgage and your own power system, your home [shelter] is safe regardless of whether you lose your job or whatever financial hassles come your way. That has to be worth a lot, though I don't know how one would put a dollar value on it. Peace of mind, though.

Plus, it is simply cool to be offgrid.
• Solar Expert Posts: 49
Re: pay off morgage or get solar panels, what's most economical?

No mortgage is the way to go. In fact if you are able, pay your monthly mortgage till it hurts. 15 year mortgage is way less total payment to the bank than 30 year mortgage with the same interest rate. In other words, don't work for the bank for 30 years if you can work for the bank that owns your mortgage for 15 years.

Go online and look for a mortgage calc and plug in say 5% and principal owe \$200000. Plugin 15 year and 30 year. Total life of the mortgage would be \$285k and \$387k. Minus principal \$85k interest to the bank versus \$187k. Monthly payment difference \$1,581.59 versus \$1080. \$500 extra a month. What are going to do for the next 15yr mortgage free?

The first 3 years of 'owning' our house, we were on a 30 year mortgage because we couldn't get a credit history when we moved from Canada. Then we managed to get a 10 yr mortgage for 4.75%. Paid it off in 7.5 years. That was more than a year ago. Paid off the house with initial 20% down. Mortgage free now. I don't work for the bank/mortgage anymore.

Don't worry about the tax return on mortgage. It is significantly small based on income. In other words, don't step on the dollar bill to pickup a penny.

Now, I can work on my solar experimental projects. This is our method.
• Solar Expert Posts: 262 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

I completely agree with SolarT; you have to compare what you are thinking of with putting the extra money you would have spent on solar toward a mortgage prepay.

It's tough to say for sure without specific figures, but depending on things like state and local tax rates, it may not be that hard to beat a 3.7% or even 5.1% compounded return by prepaying your mortgage instead. In fact, I'd be very surprised if solar was more cost effective.

Also, if you prepay the mortgage, the risks all lie with the lender. For instance, they are assuming the future interest rate risk in giving you the option to prepay (and leaving you the option of returning to a smaller payment if you have to in the future). If you go with solar, you are assuming both the forward interest rate risk (what happens if rates stay low or fall more?) as well as potential costs/risks associated with the solar system.
• Solar Expert Posts: 49
Re: pay off morgage or get solar panels, what's most economical?

On financing, just a different tack - do not incur any credit card balance at all. Pay it all off monthly. Do not pay minimum monthly credit card and save the money in bank. The math is just insane. Credit card are usually 12.5% to 28% compounded daily versus mortgage ~5.75% vs bank saving 0.1%. So pay off credit card first then mortgage. Pay off the amount that has the highest interest rate first obviously.

In other words, spend within your income limit.
• Solar Expert Posts: 375 ✭✭
Re: pay off morgage or get solar panels, what's most economical?
SolarT wrote: »
In other words, spend within your income limit.

Edward
• Solar Expert Posts: 2,381 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?
SolarT wrote: »
On financing, just a different tack - do not incur any credit card balance at all. Pay it all off monthly. Do not pay minimum monthly credit card and save the money in bank. The math is just insane. Credit card are usually 12.5% to 28% compounded daily versus mortgage ~5.75% vs bank saving 0.1%. So pay off credit card first then mortgage. Pay off the amount that has the highest interest rate first obviously.

In other words, spend within your income limit.

I used to be the short gratification credit purchaser poster child, but finally figured out the game my old man always told me that would work better. I totally agree with the debt free life, I bought this place in 1997, worked like a dog for 6 years and paid off the 110K mortgage. In the mean time I cleared all my other debt. Then for the next few years I fixed this place up, added a pool. did the landscaping, etc.

This allowed us to start to get ready for retirement, and start to put away assets. Not to say that I won't leverage some credit now, but always with the short term plan to clear it before the expenses of the debt gets large. Credit cards are paid off every month, car loans are only to get to a point of pay off in the short term usually with large down payments. We are never slaves to the credit, and always have a nice contingency fund stashed to cover it if needed.

A couple things happened, my marriage stress went way down, we could plan for the things we like and need , like our PV and thermal solar systems and the new workshop building. We can fully participate in our 401K plans and Employee stock plans while saving more on top of that. We learn to live on a less demanding cash position every month. Bills are minimal. Our credit scores soared.

Without a interest on solar system the ROI was much better and helped in the justification to spend the money.

The way the tax system is today you have to have a fairly large mortgage to get any tax break to beat the standard deduction. I much prefer paying the taxes which amount to about 1/3 of the income vs paying 100% to a bank to save that 1/3.

I think we went one further than "live within your means", we live well under our means and it makes a huge difference in what you can really do in life. That also prepares you for the fixed income time of life we all come to eventually.
• Solar Expert Posts: 472 ✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

Had to double-check, thought I was on the Dave Ramsey forums for a minute...

Another vote for paying off the house! I never understood the deduction argument, send the bank \$1k to save \$250-300 on taxes? If I really want that deal I can make a charitable contribution, get the same result, and my money goes toward helping some cause I like rather than building a bigger bank building downtown.

My personal preference now is to cashflow everything. If I don't have the money in the bank, I don't buy it. Keeps me out of trouble! It also gives me a much greater sense of peace - if I were to lose my job, without a mortgage (more specifically, without ANY debt) it takes very little to keep going. I'm no longer a wage-slave who works because I HAVE to, I'm working where I am because I WANT to.

Now, it'd be even better with enough solar panels on the roof to keep my small army of electronic gadgets going without paying the electric company, but at least right now it's still considerably cheaper to buy from the electric company - especially after adding in the battery bank. Pure grid-tie is something else I don't quite agree with, I'd be one frustrated dude if I had multi-kW in generating capacity but couldn't use it when the grid went down!
• Solar Expert Posts: 277 ✭✭✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

G.O.O.D

Get out of debt. Own your home, really own it. Your cash flow will be through the roof. You will not be beholdened. Solar cost will be easy peasy without that mortgage payment...

Yes I know Uncle Sam is giving you credit for the interest you pay on the mortgage but so what. That is a whole different ball of wax that doesn't quite fit into this forum. Don't get me started....:p
• Solar Expert Posts: 5,870 ✭✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

Some balance on the other side is that if your job or income is not stable, what one really needs is a large cash reserve. Buying a solar system or paying off a mortgage is the wrong thing to do in that case.
"we go where power lines don't" Sierra Mountains near Mariposa/Yosemite CA
http://members.sti.net/offgridsolar/
E-mail [email protected]

• Solar Expert Posts: 5,433 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

While I am a fan of being debt free, an argument can be made that debt on an appreciating asset can be a good tool. In th days of inflating house values, leveraging a 20% down on an \$X house has made sense.

The other way to look at is is, are you paying more in mortgage interest than you could reasonably safely return on another investment. During the halcyon days of the 90s buying on steep mortgages freed cash to out in other investments tht paid more than the mortars cost net/net. Now that the yield on other reasonably safe investment vehicles is way down I suggest paying off the debt.

Debt is in essence, a too to be used wisely, and too m any don't use it wisely. How many folks do you know of who paid off expensive CC debt by refinancing the house, so now they are spending 30 years to pay off their blue jeans? The really stupid ones went out and wracked up big CC debt again, leaving them in an ever bigger hole.

It worked fine,,,until the house values didn't keep up!

As for p aging off the debt or a buying solar, factor in your comfort factor owing money, guess at what your energy costs are likely to be going forward, and the make the choice.

Tony

PS. I would never (if I could avoid it) have debt on a depreciating asset, like a car. How many people are under water on car loans the day they drive off the lot. Buy a cheap car to get by, then pay yourself the car payment for t he next one!
• Solar Expert Posts: 1,351 ✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

Only \$0.106 per kWH... Pay off any credit card balance then the mortgage. Make sure you keep at least 6 months reserve in cash.

Focus on improvements and conservation. 26500 kwh/yr is 72.6 kWH avg per day. That is one hell of a lot of electric useage. Don't know where you live but it usually requires a lot of air conditioning to run up that much electric useage.

Start with examining you use profile, get a 7 day, multi-points/day thermostat. Look at age and SEER of unit. You might save alot upgrading unit. How is your house insulation? Windows?

Hot water is usually next most consumption if heated by electric.

A lot of places you can spend improvements on that will reduce you electric bill besides adding PV.
• Solar Expert Posts: 143 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

Here's another scenario, I have X\$ in a IRA that is basically setting there drawing 1.2%.
I pay an average of .184 per KWH today, who knows next year.
I can invest in a system that will cover my usage most months saving me roughly \$2000.00 a year for less than \$5.00 a watt ( A LOT LESS IF I INSTALL IT MYSELF).
I've been told that it WILL NOT ever pay for itself.
I must be dumb, but I think a \$ saved is a \$ earned.
The taxes would be basically a wash if I took it out of the IRA and got the 30% tax credit.
Re: pay off morgage or get solar panels, what's most economical?

I won't say that it can never pay off... It is a matter of cost of the installation, replacing the central GT inverter every ~10 years, plus property taxes (depending on locality).

And--GT Solar 1 Year Net Metering (or whatever you have) is a "gift" of the state PUC and tax/rate payers. It is possible in the future that the PUC/Utility will change from 1 year net metering to paying you for avoid cost of power (for example, and reduce your pay back "funds" by 1/2 or more).

In the end, there are a lot of variables that are not in your control.

If you have "extra funds" and plan on living there 10-20+ years--probably not a problem to spend it on GT solar.

If a person is living pay check to pay check and has credit cards, mortgages, student loans, etc. to pay off--Then I would take care of all those first.

Student loads are about as close as you can get to indentured slavery in the US today (outside of court ordered payments to an ex spouse/kids). You cannot discharge those by bankruptcy--so they are near impossible to discharge if a person looses a job, gets disabled, etc.

-Bill
Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
• Solar Expert Posts: 2,381 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?
tmarch wrote: »
Here's another scenario, I have X\$ in a IRA that is basically setting there drawing 1.2%.
I pay an average of .184 per KWH today, who knows next year.
I can invest in a system that will cover my usage most months saving me roughly \$2000.00 a year for less than \$5.00 a watt ( A LOT LESS IF I INSTALL IT MYSELF).
I've been told that it WILL NOT ever pay for itself.
I must be dumb, but I think a \$ saved is a \$ earned.
The taxes would be basically a wash if I took it out of the IRA and got the 30% tax credit.

Is it a Roth? Are you of age to pull it? If it is a regular IRA pull half the money one year and the other half the next. do a system with commissioning date in Dec. and float the balance to Jan. with the local CU or bank on your next draw.

But I am no tax advisor.
• Solar Expert Posts: 39
Re: pay off morgage or get solar panels, what's most economical?

A minor thread hijack: Home mortgage interest rates are at a record low. You could easily refinance with an interest rate much lower than 5.75%.
• Solar Expert Posts: 49
Re: pay off morgage or get solar panels, what's most economical?

I have to second the motion for a refinance unless you can pay your current mortgage off in less than 2 months. Go to aimloan.com and look at the rates. You could refinance to a 4.5% 30 year fixed for next to nothing out of pocket. The amount you will pay in fees will be paid for in 1 to 2 months max on what you pay in interest.
• Solar Expert Posts: 155 ✭✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

With the economy in the state is is I would pay off my morgage. We were able to do this and buy only with cash that would have gone to payments. When my hours at work were cut back I didn't worry. I now also have more money to put into my solar. The peace of mind Is worth It:D
• Solar Expert Posts: 113 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

I didn't read every post....but... I suggest: pay off the mortgage. Some people say "Then I lose the tax deduction". Well, I'd rather pay taxes and keep what's left over than to give it all to the bank. We drove ourselves hard our entire married life to pay off the mortgage & WOW, you won't believe how life changes once you don't have that payment!
Re: pay off morgage or get solar panels, what's most economical?

Because I believe in full discussions of all sides of a question... I will relate a point that others make about mortgages...

Right now, mortgage interest is cheap. So, even though, over the 30 years for a 5% loan you pay almost 2x the price of the loan (\$250k loan, \$230k in interest payments + \$250k principle)... There are people who argue that you would be better with 20% down on the home and carrying the rest in a loan.

IF (a big if ) you are worried about things hitting rotating objects... The bank will not give you a loan on your property (no income, no loan) and/or no money in economy, very difficult to impossible to resell your home.

That 80% liquid cash (or whatever you have left after "buying" your home) in pocket may be very handy to have to pay for day to day needs (no credit, banks closed) and even make payments on the loan--and if the banks are closed, there will be nobody there to reposes the home in the immediate future anyway. Gives you flexibility.

So--One could make similar discussions about cash vs loan vs "lease" for solar too... More or less fixed for your home. Very little to zero value in reselling your home (and low value if you pull off and resell the panels).

Me, I personally did pay of my mortgage off early (we bought less house than we could afford--so it was easier for us).

But--unless you plan on living in a home for 10-20+ years, "investing" your free capital in your home may not offer a good return or security for your family.

Most forms of loans can be discharged in bankruptcy... US Government student loans cannot. If you have student loans and a home--paying off the student loans with money from a loan on your home--probably a good idea. If nothing else, you could later walk away from market/job failures with non-student loans.

-Bill
Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
• Solar Expert Posts: 50 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?
I have to second the motion for a refinance unless you can pay your current mortgage off in less than 2 months. Go to aimloan.com and look at the rates. You could refinance to a 4.5% 30 year fixed for next to nothing out of pocket. The amount you will pay in fees will be paid for in 1 to 2 months max on what you pay in interest.

i was in real estate for too many years (21)- what you're not allowing for is the closing costs on the new loan - general rule we used was a refinance was viable only if a) 2% or greater drop in interest AND b) you will be keeping the property another 7-8 years to recover the closing costs. Otherwise, the savings are not there

and another consideration - don't know how long this seller has been paying on this mortgage - but assuming 8-10 years, he's starting to move into stronger principal reduction with each pmt. First few years of the mortgage, very little of the pmt goes toward the principal.
• Solar Expert Posts: 49
Re: pay off morgage or get solar panels, what's most economical?
i was in real estate for too many years (21)- what you're not allowing for is the closing costs on the new loan - general rule we used was a refinance was viable only if a) 2% or greater drop in interest AND b) you will be keeping the property another 7-8 years to recover the closing costs. Otherwise, the savings are not there

Not to be smart, but you need to check the link before you speak.

I am a real estate broker as well as an accountant and I assure you I took the closing costs into consideration. In fact the example I gave has a closing cost of about \$100 because of the interest rate. Notice the rate was 4.5%... this gives him a credit towards closing.

Depending on how fast he was planing on paying off the mortgage, it may be worth the extra cost to get a lower interest rate. Without knowing the exact numbers, I can only make a very general example.

and another consideration - don't know how long this seller has been paying on this mortgage - but assuming 8-10 years, he's starting to move into stronger principal reduction with each pmt. First few years of the mortgage, very little of the pmt goes toward the principal.

That may be true, however just because you refinance to a 30 year loan (at lower interest) does not mean it will take you 30 years to pay it off. If the interest rate is lower and you pay the same amount as your old payment, you will pay the house off faster with a lower rate interest. If however, you only pay the minimal amount... see you in 30 years.

Shane
• Solar Expert Posts: 50 ✭✭✭✭
Re: pay off morgage or get solar panels, what's most economical?

i'll concede i didn't read your entire post earlier, but that aside, not sure how to reconcile our difference

i ran the numbers too many times and unless there's been some developments since i left RE (1991), like zero or minimum closing costs, 2% difference was the break even on refinancing with 7 - 8 years planned on keeping the property & new mortgage

2nd concern, assuming true zero closing costs (not closing costs added to new mtge total) i've seen too many fees hidden or folded into the new mortgage - the mortgage brokers have to make a living doing the refinance - if there were no profit, there'd be no reason to write em.

and then there's the possibility of prepayment penalties structured into the existing mortgage that will have to be paid at the refinance settlement.
• Solar Expert Posts: 713 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

How do you figure only 3.7% for the solar ROI? Don't know your exact situation but a 4kW GT system with \$.106/kWH should save something like \$80/month which is more like a 16% ROI on a \$6000 net investment. Because of the tax incentives and your DIY, I think your money is better leveraged on the solar. Take the electric bill savings and put that toward your mortgage.
• Solar Expert Posts: 49
Re: pay off morgage or get solar panels, what's most economical?
i'll concede i didn't read your entire post earlier, but that aside, not sure how to reconcile our difference

i ran the numbers too many times and unless there's been some developments since i left RE (1991), like zero or minimum closing costs, 2% difference was the break even on refinancing with 7 - 8 years planned on keeping the property & new mortgage

2nd concern, assuming true zero closing costs (not closing costs added to new mtge total) i've seen too many fees hidden or folded into the new mortgage - the mortgage brokers have to make a living doing the refinance - if there were no profit, there'd be no reason to write em.

and then there's the possibility of prepayment penalties structured into the existing mortgage that will have to be paid at the refinance settlement.

Generally speaking you are correct. As for the low cost closing, what is happening is the opposite of paying points to reduce the interest rate. Instead of getting a 4.250 with no points he would be getting a 4.500 with a rebate towards closing.

Again without knowing his exact numbers it is impossible to say what the best course of action would be.

Shane
• Solar Expert Posts: 834 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

"How do you figure only 3.7% for the solar ROI? "

No the ROI is a whopping 5.1%, my calculations are clearly listed let me know what you think is incorrect.
• Solar Expert Posts: 713 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

I can go for the \$20,571 cumulative savings over 25 years, but that is a lot more than a few percent ROI on \$6000. \$20,571/25 = \$823 per year / \$6000 = 14%
• Solar Expert Posts: 834 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

Maybe ROI is not the right financial term.??
the interest rate is 5.1% using compound interest calculator.
Your calculation is simple interest, which should never be used for long term investments.

the problem with a solar "investment" is that after 25 years the panels theoretically are about useless and worth nothing because they might start failing. thus your original principal payment is now worth nothing. compare that to a house or some other big ticket item where the principal is still of value at the end of a mortgage.
• Solar Expert Posts: 143 ✭✭
Re: pay off morgage or get solar panels, what's most economical?

I've got a 6K system installed and sure hope that it does better than my IRA as far as ROI.
At the current rate from the utility (.19 cents per KWH) it makes some investments look worse.
If it lasts 25 years it will still cost less than a vehicle that will depreciate faster and it cost less than most of them ( little over \$4.00 a watt).