Have you been following our move to solar power? In case you haven't let me bring you up to date. For Earth Day this year, I started to explore whether going with solar power would save me money. Then I forgot about it until the question of leasing solar panels came up. I got of my Lazy butt, and had a company do an initial proposal that would cover 83% of our energy needs. In meeting with the company, we came up with a revised proposal that could cover 101% of our energy needs.
This all puts us in a place where we are looking at a 28 panel, 7700 watt system that cost $33,110. However with state and federal subsidies, our final cost would be $16,440. The federal subsidy of $7000 comes in the form of a tax credit. I have to look, but I'm guessing we'd have to wait close to a full year, because they won't install the panels until next spring.
The state grant is taken off the top right away, so we are left responsible for footing the $23,485 bill while we wait for the $7000 federal tax credit.
luck good planning would have it, the local solar vendor has partnered with a bank to provide financing. It was conveniently provided with the rest of the information. Unfortunately, this financing was horrendous. I'm not going to mince words, but Admiral's Bank isn't even worthy of being an Ensign.
The solar company's packet contained a graph that the system would pay for itself in 9 years if electricity has 3% inflation. If it has 5% inflation, it pays for itself in 6 years. This is exciting stuff, when you are looking at 25 years of use. That's a lot of years of free electricity. The math was something like $40,000 in electricity for $16,440... obviously a big savings. The $40,000 number makes sense because we pay $1522 a year now and in 25 years that's $38,000 assuming no inflation.
Then you flip to the page and look at Admiral's Bank's financing. They outlay a 20-year loan where you'd pay $32,168 to save $41,699. It is considerably less exciting to save $9,000 over 25 years. In fact, it is $360 a year or $30 a month... less than a quick call to my cable company recently saved me. The savings looked even worse when you looked at it on a yearly basis, since the real savings came in the years 20-25 when the loan was paid off. Before that there were a lot of years where the savings were less than $200.
Perhaps most interesting, they ran all these numbers without ever showing what interest rate they were using. In fairness, they didn't pull my credit to see what I qualified for. No, screw fairness Admiral's Bank, just print the damn number so I can see what you are using to calculate these numbers that suck up my sweet solar savings. Admiral's Bank spends so much space saying that you'll be saving $9,000 that they don't tell you that you'll be paying double the cost of the system with this financing. They do point out that the interest on the loan qualifies for a tax deduction which makes it look better.
After talking with the solar vendor, he was able to get me a range of rates that Admiral's Bank uses based on credit score. On the 20 year loan that was outlined, the best rate is a shade under 7% for the very best credit, and shade under 9% if you are in a 700-724 score range (which isn't that bad). So while I still don't know what interest rate was used for this paperwork, it gives me an idea.
We would qualify for that 7% rate, but Admiral's Bank didn't pull my credit report to know that. If they presumed a 710 credit score and ran the numbers with a 9% rate, it is easy to see how that loan product would look terrible when extended over 20 years.
On principle alone, I couldn't deal with Admiral's Bank. Their 5-year loan, at the best credit is 4.99%, which is much more reasonable, but pushing long-term rates in the 8-9% just upset me. (Can you tell?)
Looking into Home Equity Loans
I booked an appointment with the local bank that serviced my mortgage to ask about their Home Equity Loans. Of course the big difference is that these are loans secured against our home rather what Admiral's Bank was offering.
Nonetheless, the local bank has a 5-year option home equity loan at 3.875%. That's much better.
I ran the math through a calculator and realized something that surprised me. It was almost exactly our car payment. This was an easy way to explain it to my wife. We paid roughly the same $23,000 for our Suburu Forrester and financed it over 60 months (hey that's 5 years!) at 0%. While we wouldn't be getting the 0% rate here, the numbers are fairly similar. So I explained that we take a little financial burden, $431.19 a month, for now to save on electricity for years. We already pay $125 a month, so the additional cost would be ~$300... and when the $7000 federal tax credit comes through next year, a big chunk of that gets paid off.
However, it gets better.
The bank has potentially a better deal for Home Equity Lines of Credit. There is a choice of the following:
- For 12 months, they are offering a 2.49% rate. After that it goes to the Prime rate which is currently 3.25%, but can adjust upward.
- For 24 months, they are offering a 2.99% rate. After that it varies with the Prime rate.
To get the special rates, I'd have to commit as soon as possible as they could disappear at any time. However, this means the clock starts on the special rate, even though we don't need to make payments for a little bit... and we wouldn't get savings until next Spring when they can be installed.
In some ways it doesn't make sense to go with the 2.49% rate since a few months of it would go to waste because I simply don't have to make payments.
I think I'm looking at the second rate as being best. The Prime rate has stayed pretty steady for a few years now, and while it might go up a quarter percent, I don't expect it to go up much over the next couple of years.
I plugged this option into BankRate's Loan Calculator and the amortization table shows that we'd spend about $705 in interest on this loan... and that's assume that Prime goes up and the average rate is 3.25%.
Alternatively the 5-year loan at 3.875% would have us paying nearly $1300 in total interest throughout the loan.
We could aggressively pay it off, maybe as soon as in two years. However, if Prime stays low and the interest is tax deductible, should we really be in any rush to pay it off? I think about it, and it is almost like paying off a mortgage with a 3.25% rate early, can't we find a better opportunity than a less than 3.25% return (when accounting for the tax deduction.)?
For example, I've been earning over 7% interest in Lending Club amongst hundreds of diversified loans. That's just one quick option that came to my mind.
Allow me to flip this question back on the readers. Which financing option would you take? If it's the 2-year at 2.99% HELOC that adjusts to Prime, would you be in a rush to pay it back? Or would you trust that you'd have ample warning before that rate got out of control?
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