Should I install a solar energy system using a home equity loan, even when rates are at 8.25%?

Q. What is your take on upgrading your house to include solar energy and taking the money out of the equity of your home even when rates are at 8.25%. They may not rise before summer, but do you see them rising after that?

A. It's often hard to determine whether solar heating or electrical systems will save much if any money in the long run. You not only have to consider the cost of buying, installing, maintaining and financing the equipment, but the price of natural gas and electricity over the next decade as well. That is very difficult to forecast. But most homeowners who install solar systems seem to be happy with their decision. Even if they don't save a lot of money, they have the satisfaction of knowing they did something good for the environment. How do you put a dollar figure on that?

But if you're going to do it, you should do it now because you should qualify for some generous tax credits that are only available this year. Whether you're installing photovoltaic panels that turn sunlight into electricity or a water heating system, you'll receive a tax credit for 30% the cost of the system, up to a maximum of $2,000. Each project must meet specific criteria and the work must be completed by 2007. Your contractor should know the details. (You can also get tax credits for other improvements, such as new windows, air conditioning units and water heaters.)

As far as where the prime rate will go this year, the best guess is that it should stay at 8.25% at least until August. What the Federal Reserve decides to do after that will depend on the economic data we see over the next six months. If you decide to go with a home equity loan to finance your project, be sure and shop around. Some banks, particularly smaller ones, are offering rates that are 0.5% or even 1.0% below prime. You can find the best deals on our comparison charts of home equity rates.

Another option would be a cash-out refinancing. This is where you refinance your primary mortgage for more than your current balance and use the extra cash to pay for your solar project. With home equity rates so high, that has become a very popular way to get money for home improvements and to pay off credit card debt, because average mortgage rates are still below 6.5%. If you're paying more than 7% on your current mortgage, or you have an adjustable rate loan that's poised to go that high, this could be a less expensive way to go.

By: http://home-equity.interest.com