There are many different ways to secure swimming pool financing. While you won’t necessarily find a product labeled “pool loan” on your lender’s website, there are a litany of financial products which can get you the money you need to install your family’s warm-weather oasis.
Chris Blakely, CFP based in Pennsylvania, recommends these products in a very specific order.
Home Equity Line of Credit (HELOC)
If you have equity in your home, you can consider taking out a home equity line of credit (HELOC). Think of it as a credit card with dramatically lower interest rates. Your financial institution will tell you how much you can borrow relative to your debt-to-income ratio, credit rating and the equity you have built in your home, and you can then draw money against that line of credit when you need it.
Blakely likes this option because you can borrow the exact amount you need as the bills for supplies and labor come in, and the interest you pay on a HELOC is typically tax-deductible. According to Michael Kitces, MTAX and creator of Nerd’s Eye View, this will continue to be true under the new tax law as long as the borrowed money is used to acquire, build or improve your primary residence. However, because this deduction will now max out at $750,000 of indebtedness, it is wise to sit down with an accountant before placing your bets on tax deductibility.
Blakely does caution against the down sides, too.
“Because the home is the collateral on a HELOC, you will have to have a home appraisal done — which is a sizeable expense,” he said. “You’ll also have to look at whatever the lender’s fees are for processing the HELOC, closing costs, points, etc. These are typical fees associated with bank lending.”
Interest rates on this product are low because your home is the collateral. The downside to that if you fail to repay the loan is you could be facing foreclosure.
Home Equity Loan
Home equity loans are similar to HELOCs in that they are based on your debt-to-income ratio, credit rating and home equity. The difference is that you will be borrowing a lump sum of money upfront and then repay the balance as an installment loan.
Home equity loans are a good option for pool loans for a few reasons. First, because your home is collateral, your interest rates are likely going to be lower than unsecured loans with no collateral. Blakely emphasizes that you should make sure the interest rate on your loan is fixed so that it stays steady over the course of your loan term — which he says should be 10 to 15 years.
Because the structure of your loan doesn’t matter, Kitces says the interest that you pay on these loans will continue to be tax-deductible if they are used for the building, acquisition or improvement of your primary residence up to $750,000 — just like with a HELOC.
You will have to pay closing costs on your second mortgage, so be sure to familiarize yourself with what those costs will be before taking on the loan.
Cash-out refinance
If you have equity in your home, Blakely recommends a cash-out refinance as the third best option for your pool loan. With a cash-out refinance, you’re essentially taking out a new mortgage. You’ll be consolidating two expenses into the new mortgage: your current mortgage balance and the cost of your new pool.
The pros to this method are that your interest rates are likely to be lower than unsecured options like personal loans or credit cards, and the interest that you do pay is likely to be tax-deductible.
Depending on when you took out your original mortgage, your interest rate on a cash-out refinance may be lower than what you’re paying now. Blakely notes that this doesn’t mean you’ll be paying less money long term. Because mortgages are amortized, you pay more in interest than in principal at the outset. If you’re 10 years into a 30-year mortgage when you refinance, you’ll be paying less toward the equity in your home during the next 10 years than if you had not refinanced. You will also be paying interest for 10 years longer than if you did not refinance, which is likely to make your overall costs higher.
Because you’re refinancing your mortgage along with financing your pool, fees and expenses are higher with a cash-out refinance than they are with a HELOC or home equity loan.
Personal loans
Personal loans are unsecured debt, which means there is no collateral backing your word that you’ll pay the money back. For this reason, when you use a personal loan for a pool loan, your lender is likely to offer you a higher interest rate than the products which use your home as collateral. Again, Blakely reminds consumers to look for fixed-interest products rather than those with variable rates.
Blakely does say that personal loans are one of the better options if you have no equity in your home to leverage a cash-out refinance, home equity loan or HELOC. However, with the average pool costing between $50,000 and $60,000, he says the amount your lender offers you on a personal loan may not entirely cover the costs of the project.
If you must use a personal loan as a pool loan, make sure to calculate expenses like application or origination fees into the total. You also want to make sure there are no prepayment penalties that would prevent you from paying the higher-interest loan off before the end of your loan term.
Pool company financing
Some pool installation companies offer financing directly to consumers, though Vaughan says that he has seen more consumers use HELOCs and home equity loans over the course of his career.
The financing options may be secured or unsecured, and while fees can vary from company to company, it’s unlikely that you’ll be able to refinance with a company other than the one who is installing your pool.
For that reason, you should compare this financing option against HELOCs, home equity loans, cash-out refinancing and personal loans rather than comparing the financing installation company by installation company. Who installs your pool should be a choice based on reputation and credentials rather than financing options or availability.
Credit cards
Credit cards, which come with high interest rates and confusing formulas behind minimum monthly payments, are a no-go, according to Blakely.
“If this turns out to be your only option as the other options aren’t viable for you due to debt constraints or credit issues, just splurge for a weekend at your local Holiday Inn and hang out by the pool,” he said. “Interest rates are way too high on credit cards. You’ll end up underwater or drowning in debt.”
