Can You Use A Home Equity Loan For A Pool?
Imagine swimming in your own backyard pool or soaking up some sunbeams in your poolside lounge chair.
Sound tantalizing? It may be time to turn this dream into a reality. In many cases, homeowners may wonder if they can tap into a home equity loan for a pool in order to create a warm weather paradise of their own.
So, can you use a home equity loan for a pool?
The short answer: Yes, you can use a home equity loan to build a pool.
Let's unpack the details of using a home equity loan for a pool, including the pros and cons, alternative options and frequently asked questions. But first let’s define a home equity loan.
What Is A Home Equity Loan?
A home equity loan is a second mortgage that you receive in a lump sum and which you can qualify for by leveraging the equity in your home It comes with a fixed interest rate, which means the interest rate stays the same for the life of the loan.
Just like your primary mortgage, a home equity loan uses your home as collateral. This means that it’s used as a security to protect lenders if you stop making payments on your loan. You must qualify for a home equity loan using a specific approval process from your lender. When you repay your loan, you'll have a second loan payment to make on top of your first mortgage payment.
Equity refers to how much your home is worth verses how much you owe on it. For example, let's say your home is worth $200,000 and you owe $150,000 on your home. In this case, you have $50,000 in home equity. With home equity loans, you cannot take out all the equity in your home. Depending on your lender, you must leave a certain amount in your home.
How To Use A Home Equity Loan To Get A Pool
Financing a pool with home equity requires you to undergo a mortgage application process. Qualifying for a home equity loan involves determining your budget first. Figure out how much you can handle repaying each month and make sure it's comfortable for you.
The mortgage application process requires you to have a credit score of 680 or better, but that also depends on your lender. A higher credit score (a three-digit number that shows how well you handle debt) may allow you to access more equity in your home.
For Rocket Mortgage®, you must leave 25% of equity in your home if your credit score is 680 – 699, 15% equity with a score of 700 – 759 and 10% equity with 760+.
Your lender will also want to know your debt-to-income ratio (DTI) – the amount of money you use to pay off recurring debts per month compared to your gross monthly income. It's a good idea to shoot for a DTI of no more than 45%.
Once you apply and get approved for a home equity loan, you'll make repayments based on your loan terms. Rocket Mortgage® allows a minimum loan amount of $45,000 and a maximum loan amount of $350,000 with 10- to 20-year fixed terms.
Note that your lender will also make arrangements to get an appraisal, which means that a professional will determine the fair market value of your home.
Once you receive your lump sum, you’ll make repayments in fixed installments over a certain period of time. Because a home equity loan requires you to repay using a fixed interest rate, your interest rate and payment remain the same throughout the loan term. You’ll end up with two loan payments: your original mortgage and a second mortgage payment.
Pros Of Using A Home Equity Loan For A Pool
Look at the pros and cons before you use your home equity loan to put in a pool. First, what are some benefits of financing a pool with a home equity loan? Consider the following benefits:
- Interest rates on home equity loans can be relatively low. Certain types of loans require you to make higher interest payments than home equity loans. For example, a personal loan may require you to pay a higher interest rate compared to a home equity loan. You may want to consider several types of home equity loans.
- Fixed interest rates can lead to more predictable payments. As mentioned, fixed interest rates remain the same every month. They can offer a level of predictability to your payments.
- Interest paid may be tax-deductible. Using a home equity loan to finance a swimming pool can be tax-deductible. As long as the funds are used to buy, build or make improvements to a home, the interest on a home equity loan is deductible, according to the IRS.
Cons Of Using A Home Equity Loan For A Pool
What are the disadvantages of financing a pool with a home equity loan? Consider the following downsides of using a home equity loan to purchase a pool.
- Your home equity is used as collateral. Your lender puts another lien, or claim, on your home when they lend you money for a home equity loan. This means that if you stop making payments on your second mortgage, you could lose your home. Consider carefully whether you can make your payments. Use a home equity loan calculator to determine whether you can afford a home equity loan.
- You may have to pay closing costs. Closing costs are the processing fees that you incur when you get a home equity loan to finance a swimming pool and typically include fees such as application, origination, appraisal fees and more. Closing costs typically make up between 2% – 5% of the total loan amount. You'll pay the closing costs when you close on your home equity loan.
- You may not have enough equity in your home. Not having enough equity in your home can result in not being able to borrow the home equity needed to purchase a swimming pool.
Alternative Pool Financing Options
You may wonder about other financing opportunities for a pool. You may want to consider a cash-out refinance, home equity line of credit (HELOC), construction loan or personal loan to fund your pool project. Let's take a look at each of these options individually.
A cash-out refinance also offers another way for financing a pool with home equity. In a cash-out refinance, you replace your existing home loan with a new one using a higher loan amount than what you owe on your home. You can then receive the difference in cash.
Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) can also be used to finance a pool. Lenders will also take your credit score and DTI into account to qualify for a HELOC. Shoot for a credit score above the mid-600s, with an ideal credit score of above 700.
A HELOC functions like a line of credit, similar to how credit cards work. HELOCs allow you to withdraw money from your lender on a revolving basis based on the available equity in your home.
You can pull the amount you need to borrow throughout a draw period. It's the main difference between a HELOC and a home equity loan, which you receive in a lump sum. Unlike home equity loans which have an interest rate that stay the same, HELOCs typically have variable interest rates, which change on a periodic basis.
At the end of your draw period, you can repay your loans based on an established repayment period.
You can use a construction loan to finance a pool. A construction loan is a higher-interest short-term loan that typically allows you to withdraw funds for a year or so, while construction on your pool is completed. You can use it for all costs related to your home improvement project, including building permits, land, construction materials, labor, appliances and more.
Just like with a regular mortgage, you'll have to furnish your credit score and other documents like tax returns, W-2s and bank statements to your lender in order to prove that you can pay back your loan.
It's possible to get a personal loan to finance a pool, and those with good credit may receive the best rates. Personal loans are unsecured installment loans that allow you to borrow a one-time lump sum from a lender which you repay at a fixed interest rate. In order to get a personal loan, just like the other loans listed here, you'll need to show your lender personal identification, proof of income, employment information, proof of residence and other required documentation the lender would like to see.
Should You Use A Home Equity Loan To Build A Pool?
As with most things, financing a pool with a home equity loan is a personal decision. However, make sure you can afford the monthly payments. It's one of the most important things to keep in mind when deciding whether to use a home equity loan for a pool. It's a good idea to examine your long-term financial goals as well as whether building a pool will increase the value of your home.
FAQs For Financing A Pool With A Home Equity Loan
You may have more questions about using a home equity loan to finance a swimming pool. Let's take a look at a few so you get all of your questions.
What is the repayment period on a home equity loan?
The repayment period on a home equity loan varies depending on your lender. Most terms range from five to 20 years but you may find a lender who will allow a 30-year loan term to pay back a home equity loan. Rocket Mortgage allows 10- and 20-year fixed terms.
What are the borrower requirements for a home equity loan?
The lump sum amount you can borrow from your lender depends on the amount of equity you have in your home as well as your credit score. It’s a good idea to shoot for a 620 credit score or higher as well as a DTI of 45% or lower.
Above all, your lender will try to get a sense of how well you handle debt to decide whether you will qualify for a home equity loan. DTI refers to the amount of debt you have relative to your income. You can calculate your DTI by adding up your fixed monthly debts and dividing by your gross monthly income and converting it to a percentage.
Will building a pool increase the value of my home?
Building a swimming pool may or may not increase home value. An appraiser can help you determine whether or not adding a swimming pool will affect the fair market value of your home. For example, if your home is valued at $300,000 without a pool and would be worth $310,000 with a pool, it may not be worth the cost, particularly if installation costs upward of $60,000. It's a good idea to do extensive research and math before you make a final decision about whether or not to get a home equity loan for a pool.
The Bottom Line
Whether your dream is to finance an aboveground or inground pool, you can take out a home equity loan or another loan type to finance it. Between a cash-out refinance, HELOC, construction loan or personal loan, you have some options available to you. Consider your other qualifications and how much it will cost monthly to make sure that you land on the right option for your financial situation.
Ready to add a pool to your backyard oasis? Fill out an online application today.