Should You Use a Home Equity Loan to Build a Pool?
It’s almost as American as apple pie and baseball: a backyard pool where kids splash with friends on a hot summer day and adults relax after a long day at work. And across the U.S., swimming pool sales and installation is big business. As of 2015, there were more than 5.1 million in-ground pools nationwide, according to the Association of Pool & Spa Professionals.
Buying and installing a new pool can cost tens of thousands of dollars, so few homeowners can pay cash. If you have equity in your home, you may wonder whether you can – or should – tap into that money to finance the project.
There’s no simple answer. The right decision depends on your financial situation and your motivations for getting the pool. So let’s dive in to what you should consider before using a home equity loan to build a pool.
Using a home equity loan to build a pool
Homeowners who don’t have the cash available to buy and install a pool can tap their home equity to help pay for the new addition. But is it a smart move? Here’s a look at the pros and cons.
- Lower interest rate. A home equity loan typically comes with a lower interest rate than you would get by using a credit card or personal loan.
- Potential tax benefits. The proceeds from a home equity loan can be used for any purpose, but the interest paid on the loan is tax deductible if it is used to “buy, build or substantially improve” the home securing the loan, per the Tax Cuts and Jobs Act of 2017. Keep in mind, you’ll need to itemize deductions to take advantage of the tax break.
- Fixed interest rates. Interest rates on home equity lines of credit (HELOCs) and credit cards are generally variable, so if interest rates rise, your payments go up as well. But home equity loans usually come with fixed interest rates. That makes it easier to know in advance what the total cost of financing your pool will be.
- Puts your home at risk. A home equity loan uses your home as collateral. If you aren’t able to keep up with your monthly payments, the lender could foreclose on your house.
- Closing costs. Taking out a home equity loan involves closing costs and fees. While those vary by lender, they typically run between 2% to 5% of the amount borrowed.
- Higher interest rates. Interest rates on home equity loans are typically higher than those offered for HELOCs. You’re essentially forgoing a lower interest rate in exchange for stability in the rate you’ll pay over time.
- Time-consuming approval process. Before you can get approved for a home equity loan, the lender will need to review your credit and verify your income. It may ask for a copy of the deed to your home, pay stubs or two years of tax returns. It also could require an appraisal of the property. The time it takes to close on a home equity loan will vary depending on the lender and the complexity of your financial situation, but it typically takes four to six weeks.
- You may not have enough equity. Lenders typically limit the amount you can borrow to 85% of the total value of your home, minus whatever debt is left on it. Let’s say you have a home worth $200,000 and a mortgage balance of $160,000. Few lenders would let you borrow the full $40,000 of equity in your home. In most cases, the maximum home equity loan you could get would be $10,000. (Here’s the math: 85% of the $200,000 home value is $170,000. Take out the $160,000 left on the first mortgage and you get the $10,000 home equity loan amount).
The cost and value of building a swimming pool
The total cost can vary dramatically depending on the size and type of pool you want and where you live. The material used for the liner can also impact the price.
The liner of an in-ground pool may be made of vinyl, fiberglass or concrete, according to Fixr. Vinyl is typically the cheapest option and carries an average cost of $25,700, Fixr says, while fiberglass construction bumps the price up to an average of $31,400. A concrete liner, the most durable option, will cost somewhere between $29,600 and $50,000, Fixr says.
Of course, the pool itself isn’t the only cost consideration. You may want to install a deck, patio, fence, heating and filtration, slide, diving board or attached spa. All these features will drive up your total. Pools on the high end can wind up costing as much as $100,000, according to HomeAdvisor.
Then there are the ongoing expenses. Between basic cleaning and upkeep, repairs and utilities, HomeAdvisor said homeowners can expect to spend as much as $3,000 to $5,000 a year to keep their pool in good, working condition.
But you’ll get your money back when you sell the house, right? That depends.
“Whether or not it increases the value of your home is entirely dependent on where you live,” said Tammi Lindley, a senior loan officer with Mortgage Express in Portland, Ore. “Are pools the norm for your neighborhood? Then it might make sense to have it installed.” If not, potential buyers could consider them a safety hazard and maintenance nightmare, Lindley said.
The National Association of Realtors estimated in 2018 that homeowners recover only about 43% of the cost of installing an in-ground pool. Only a tiny percentage of real estate agents recommended installing a poll for the resale value.
If you decide to build a pool, a home equity loan is not your only option for paying for the project. Consider these alternatives.
Pools are expensive, and adding interest payments only drives up the price. Consider saving up enough money to pay for the project outright rather than financing it.
Think you can’t afford to save that much? Consider how much your monthly expenses would increase with a home equity loan and pool maintenance costs. If your loan payment would be an extra $400 a month and maintenance and utilities for the pool would cost $300 a month, that’s $700 a month you could start putting toward saving for the pool. At that rate, you could save $30,000 in less than four years.
Some pool installation companies offer financing to their customers. Compare the rates and terms offered by your installation company to those available through a home equity loan to decide which is the better option.
If you have a high enough limit on your credit card, swiping the plastic may be the fastest route to financing your pool installation. But credit cards typically come with high interest rates. The average credit card APR is about 15%.
With a cash-out refinance, you take out a new mortgage with a balance higher than the amount you owe. Your new loan is first used to pay off your existing mortgage, then the rest comes to you in cash. The interest rate for a cash-out refinance will likely be lower than the rate you’d receive for a home equity loan. But between closing costs and extending your loan term, it could cost you more in the long run.
A construction loan is a short-term loan designed to fund building or remodeling a home. The money borrowed is paid out in chunks as construction progresses, so you only pay interest on the amount outstanding while the project is underway. Once construction is finished, you can pay off a construction loan in a lump sum or refinance into a longer-term mortgage.
Corey Vandenberg, a mortgage broker with Platinum Home Mortgage in Lafayette, Ind., said construction loans are often a better financing option for pool installations. These loans typically offer competitive fixed rates and take into consideration the future value of the home once the pool is completed. “In the long run, this is simply the best way to go,” he said.
One example of a potential construction loan is Fannie Mae’s HomeStyle Renovation mortgage. It includes swimming pools in the list of allowable improvements.
The benefit of a personal loan is that it is not backed by your home. If you run into financial troubles and cannot pay the loan for your pool, you won’t run the risk of losing your home. But personal loans typically come with higher interest rates than loans secured by your property.
Should you use a home equity loan to build a pool? It depends on your reasons for building it.
Installing a pool is expensive, and you’re not likely to recoup the costs when you sell the home. But if your reasons for wanting a pool are more about enjoying your home than increasing the resale value, the decision comes down to whether you can afford it.
If taking on an extra mortgage payment and ongoing maintenance costs won’t negatively impact your ability to meet your other financial goals, compare the interest rate and terms of a home equity loan against other financing options. Consider the pros and cons and do your research before taking the plunge.