Hundreds of thousands of people are going solar, and how you finance your system matters. Source: SunPower.

More than half a million homes and businesses in the U.S. have gone solar, and by the end of the year, that figure could top 1 million. Companies like SolarCity (SCTY.DL) and Vivint Solar (VSLR) are spreading like wildfire, and if costs keep coming down, there's incredible growth potential for solar.

But the decision to go solar isn't one homeowners should take lightly, and there are a lot of decisions to make about how to go solar. One of the biggest decisions surrounds financing solar panels. Let's find out if it makes more sense for you to lease or buy in solar today.

SolarCity workers install a residential solar system. Source: SolarCity.

How the lease made residential solar possible
There are two main ways people can finance a solar system. They can buy it themselves with cash or a loan, or they can have a third-party financier own the system and pay for it with a lease or power purchase agreement over 20 years (for simplicity's sake, I'll lump these together and call them leases).

The lease really made the modern residential solar market possible because it allowed customers to go solar with $0 down. Companies like SolarCity would put up the system and sell solar tax incentives, like accelerated depreciation and the investment tax credit, that could amount to tens of thousands of dollars per system to investors like banks, making the lease possible. Since most homeowners didn't have enough income to fully utilize these tax credits, third-party financing made sense as the industry developed.

Not only were homeowners often not capable of fully utilizing tax incentives, banks didn't know how to view solar loans, and most just shied away from them. Even today, if you go to your local bank and ask for a solar loan, they'll likely have no clue how to secure it or price the product properly. With leases, companies like SolarCity, Sunrun, Vivint Solar, and SunPower (SPWR 31.27%) were able to price systems efficiently and aggregate thousands of solar systems into one financing round a big bank could understand, instead of a bank looking at each loan individually, like it would with a typical bank loan.

The downside of the lease is that a homeowner is taking on a 20-year obligation, which may need to be transferred to a buyer if they sell the home, complicating the sale process. But so far, homeowners and installers have glossed over this potential problem, and hundreds of thousands of people signed up for lease. 

A residential solar community, one of many popping up around the country. Source: SolarCity.

Why the loan is growing in popularity
Today, the solar market is slowly shifting from leases to loans. SunPower has long offered loan or cash sale options, but finance offerings from SolarCity and Vivint Solar, No. 1 and No. 2 in residential solar market share in the U.S., were almost entirely leases until recently. That changed late last year when SolarCity started offering a loan product called MyPower that allowed ownership of the solar system and tied payments to energy production.

There are a few reasons the loan is becoming more popular. The first simply comes down to costs. To buy a residential solar system even five years ago, it would have cost $40,000 or more, and banks didn't know how to structure a loan to a customer who may not be able to utilize tax credits and may not be saving much, or any, money on their electricity bill by going solar.

But residential solar costs have come down dramatically, and now SolarCity's costs are below $3 per watt, meaning an average 5 kW system costs them just $15,000 before their profit margin. They're expecting to sell systems for at least $4.35 per watt, or $21,750 for an average system, but even that's becoming a manageable figure for many homeowners, making it possible to use the 30% tax credit, and costs are only coming down. 

So, costs are more manageable, and the other change is that financing from banks is available as well. SolarCity is offering debt to consumers to fund MyPower loans, and it recently signed a $200 million debt facility with Credit Suisse. SunPower has partnered with Admirals Bank for $200 million in loan financing. 

Once financiers began to see that they could make a good rate of return by understanding leases, they turned to loans, and now the availability of loans is increasing and the costs are dropping. That should drive more people to loans in the future. 

The wildcard in residential solar
One aspect of going solar that most people may not think about is the resale value of their home. A recent study from the Berkeley Lab estimates that host-owned solar systems add $15,000 to a home's value. Data for leased systems is less available, but it's becoming clear that leased systems make a home harder to sell. Bloomberg highlighted this last year, and it makes sense when you think about it.

If you buy a home that includes an owned solar system, you're getting an asset with the home and can likely roll it into the mortgage. If you buy a home with a leased system, you're getting a monthly liability that could be 20 years in length. Home buyers may look at the system costs and benefits much more skeptically with a lease.

Which product is right for you?
The decision to lease or buy a solar system with cash or a loan depends a lot on the consumer's individual situation. If your income is high enough to fully utilize solar tax benefits, and your cost of borrowing is low on a loan, I think that's the way consumers should lean. By owning the system, you get to keep all of the cost savings for the system, and you have an extra asset if you decide to sell your home.

But if you don't have enough income to offset the tax savings, then a $0 down solar lease may be the only way to go. It can save you money over time, and it comes with no cost upfront.

Long term, I think there's a place for both financing options in the solar industry, and different consumers will make different choices. But being more informed is key, and understanding your options before a sales person comes into your home could save you money in the long run.