Ways to borrow money for your backyard addition
Dreaming of a beautiful swimming pool, but the price of building one might overstretch your current home-improvement budget? The good news is that a number of avenues for pool financing are available to help you fund that new addition!
Some homeowners who don’t immediately have the money available to begin building a backyard resort can obtain a loan or use credit for one.
Depending on where in the country you live and how your credit score stands, you may qualify to do so. In some cases, even those with weaker credit histories have access to lending sources.
Before looking at different options for a pool loan, let’s review some financing basics and what to expect.
What is financing?
Simply put, financing is borrowing money from a financial institution to pay for an expense. People borrow when they are unable to afford a purchase with funds on hand, or when they have the current resources—but prefer to keep those liquid or invested—and to borrow for the expense.
Various forms of financing exist. Individuals apply for a loan or credit, and based on credit history and perceived ability to pay back the loan with interest, financial institutions will approve a particular kind of loan or extend credit. Certain terms will apply, and understanding them is critical. Key points to consider:
- The total monthly payment—and what portion of it covers interest vs. the principal;
- The interest rate—fixed or variable;
- The terms—how long you have to repay the money;
- The maximum amount of funding being provided; and
If all of the loan must go toward a specified expense—such as a home-improvement project.
Before signing any paperwork for a loan or charging a major purchase—like a home addition—to your credit, make sure you’re clear about all of the conditions and the fine print.
What sources are available to finance a pool purchase?
If you do it on your own, finding the right source for funding your new pool will take some time and research. That’s why many homeowners prefer to shop for a pool contractor that can help them with obtaining a loan for their project. Select a builder with a network of loan programs and a proven track record of helping match pool buyers with reputable lenders.
When considering financing, remember that two main kinds of loan exist: secured and unsecured.
With a secured loan, lenders require that borrowers provide some form of security—collateral. In many cases, this is equity in a home. With a secured loan, the lender enjoys less risk if a borrower defaults—they take the collateral. On the other hand, because the borrower put up collateral, he or she will receive the benefits of lower interest rates.
Now, with an unsecured loan, the lender does not require collateral from the borrower. That puts the lender at greater exposure for losing money if the borrower defaults. Unsecured loans—credit cards for example—tend to carry higher interest rates.
Whether you find pool financing on your own or work with a pool builder who assists, here are seven ways that you may be able to borrow money—secured and unsecured—for a new pool.
1. Finance a swimming pool through a bank.
Banks typically offer home-improvement loans to their customers. If you have an existing checking or savings account or a mortgage with a bank, its loan department may be more willing to approve you, since they know you, your spending habits, and/or your track record of making house payments.
Before a bank approves you, you will need to complete its standard loan application. Credit experts will look into your income sources, credit history, and total assets.
Many loans from banks are unsecured; if so, the credit review process may take extra time as bank staff combs through your credit report to evaluate your credit worthiness.
Many banks offer repayment terms between 12 and 144 months. However, with some loans, the interest may climb upward over time; the longer the length of the loan, the more likely higher rates kick in.
Each local, regional, or national bank has its own financing program with unique rates and conditions. Familiarize yourself with them before applying for and accepting a loan.
2. Use a credit union to borrow funds for a pool.
Unlike banks, credit unions are not-for-profit organizations that are owned by their members. As a result, they typically put a high emphasis on serving members—their shareholders—and with lower fees and interest rates than those common with banks.
If you already belong to a credit union, it may be a great avenue for seeking a loan for your backyard addition.
Even if your credit is not the best, a credit union may be more open to working with you for a loan and working out special terms.
If you are not already a credit union member, it might be worthwhile to join one to access its financing programs and other low-cost banking services. Joining one is easy if you fall into a category of allowed membership. For example, some limit membership to those in certain occupational groups (e.g., nurse, teacher, military).
However, others have broader membership conditions. Joining some may be as simple as where you live. All that’s required is that you reside in the county where the institution is located.
3. Pay for all or part of the construction with a credit card.
If you have credit cards with high limits, you may be able to use one or more to charge all or part of your pool purchase.
Some pool builders will accept plastic for all or a portion of the project price. For example, a builder might take credit card payments for the pool equipment or for the final phase (plaster finish) of construction. Others might happily swipe a card for the entire contract amount—but only if you pay the merchant service fee (typically 3%) charged by the card processor.
One benefit of buying a pool with a credit card is that the loan is unsecured; that means you won’t have to put up your home as loan collateral. However, the rates tend to be much higher.
Before going the credit card route, be sure you can repay the borrowed amount. Plot out a repayment plan and budget for yourself. Paying on time helps avoid getting hit with higher interest rates if the market rate changes (or once the introductory period ends).
Keep in mind that it might be worthwhile to pay for only a portion of the construction with a credit card and use another option for the balance. Again, choose this financing route only after you’re clear about all of the rates and conditions.
4. Finance your backyard resort with a home-equity loan.
Your home equity is the difference between the market value of your home and the mortgage balance owed on it. Your equity builds up over time and represents your share of your home’s ownership.
A home-equity loan involves the portion of the home’s value that you own. All of the money you have paid off toward your home is your equity stake, and this share can be a useful tool when it comes to remodeling your home.
Home-equity loans are available from banks, credit unions, and other financial institutions. You can obtain this kind of loan from the same lender that holds your original mortgage payments or from an entirely new, different lender.
Even if you still owe on your first mortgage, a home-equity loan may be within reach. Do your research for a lender that offers this kind of finance program. In fact, although the interest rates on a home-equity loan may be higher than the one on your original mortgage, they are still relatively low.
Another advantage: The lender’s approval process is usually quick. When using home equity to finance a home-improvement project, you may also be eligible for tax benefits.
5. Draw against a home equity line of credit (HELOC).
Because it’s a secured form of financing, a home equity line of credit offers favorable terms for borrowers. Often referred to as a HELOC, this loan works much like a credit card. Do take note: HELOCs interest rates are variable, vs. fixed; they can change depending on the market rates.
A bank or other financial institution uses your home’s equity as a line of credit toward building your pool. The lender sets a limit, similar to the way a credit card company does. You make monthly payments on borrowed money and have a certain time period for doing so.
The main reason to go with a HELOC: You pay interest on only the amount you borrow. Unlike a home-equity loan—where you receive a lump sum of money from a lender—a HELOC allows you to borrow incrementally; you can take only the exact amount need at a particular time.
So, instead of paying interest on the entire amount you will need—even if you have not yet used the full available amount—a HELOC charges interest only on the amount used so far. For a home-improvement project, this interest and borrowing structure is particularly helpful. That’s because major construction projects get executed in phases, and contractors typically require phased payments.
To illustrate, let’s use an example of a $40,000 swimming pool: You draw against your HELOC for the first payment, at excavation. You draw only the amount needed for that specific payment—say, $10,000. You will not incur interest on the remaining $30,000 until you actually draw it out over three or four increments during a construction period that may last several months.
6. Finance a swimming pool with your savings account.
Your personal saving account can serve as a source for helping acquire a pool loan. Financing programs known as “savings secured loans” or “passbook loans” use the cash in a personal savings account as collateral.
Check with your bank or credit union where you have a current savings account. You will still need to complete loan paperwork, but the process is typically quick and simple. It may not even require a credit check.
When you take out this kind of loan, your lender will move the agreed-to amount from your savings account into to a certificate of deposit. The maximum amount you can borrow may not exceed your account balance, as this is what will serve as your loan collateral.
These loans usually provide excellent interest rates, and you only have to pay interest; there is no required principal reduction. In addition, there are usually provisions that allow you to renew the terms indefinitely.
7. Borrow against your 401(k) for your outdoor addition.
If you have explored all other financing options for a pool and come up dry, you may be able to turn to your 401(k). What’s nice about this alternative is that the lender you’ll be paying back is you.
You’ll make monthly or quarterly payments to repay the account plus interest. The interest rate varies; it’s based on the prime market rate plus—typically—one or two percentage points. So you know exactly how much interest you’ll need to pay, be sure to find out the current rate and how to calculate it.
In some cases, borrowing against a retirement account makes sense. Let’s say it’s now spring, and you want to begin building a new pool so that it will be ready for summer. You are expecting some kind of major cash influx that you can use for the pool purchase—but you will not receive it until later in the year or over the next several years. Examples might be a tax refund, real estate sale, CD or money-market maturity, forthcoming inheritance, or year-end work bonus.
With the anticipated cash, you know that you will be able to pay back your retirement account. Typically, 401(k) loans need to be paid in full within five years of the withdrawal date. If it is not, a 10% early withdrawal penalty will be incurred. (Exceptions may apply if you leave your employer.)
Building a swimming pool is an investment in your home and lifestyle. Not everyone has the cash flow to start construction right away, but financing may be an option to get your pool going without a long wait.
To learn what kind of pool financing you may qualify for, start by completing a free, no-obligation loan pre-approval form. After your submission is reviewed, a financing specialist will contact you to review options based on your credit, and help you fund a new pool.
Not quite ready to seek credit pre-approval? Another option to get started is to estimate monthly payments for your potential investment in a new pool. This free-online calculator will help you test out various combinations of loan terms, interest rates, and total loan amounts.