Should I Finance a Swimming Pool?
Guest blogger and local Franklin, TN based Financial Advisor, Kevin Prendiville of Financial Transitions dives into personal finance and home improvement.
Living in the ever-changing landscape that is Nashville Tennessee brings about two guarantees. Uncertainty and heat. Lucky for you and me there are a multitude of ways to deal with both. In the old days, when country music was all country, and pickup trucks had the old 2-60 air conditioners (roll down both windows and try to hit 60 miles per hour), Tennesseans often relied on the old swimming holes that dotted every farm and country road. Of course, the massive rivers that cut through Chattanooga and the valleys of the volunteer state offer respite from the 100 degree summers. But the Tennessee economic revolution of the 2000s has brought bigger homes, new perspectives and a coastal attitude that carried with it majestic custom pools. The decadent waters of modern gunite pools are the undisputed kings of cool down.
But like with everything splendid, there is a splendid cost. However, these swimming pools will only have an associated cost, if they are financed incorrectly. The modern swimming pool can be financed in a number of ways, but in order to understand how to take advantage of such a home improvement, can we agree that we may have to learn some new finance terms and concepts?
First and foremost, the concept of inflation is typically associated with larger products or spoken of in an abstract way. But the general idea is that over time, the value of a dollar will be less over time, as more are printed. Currently the United States inflation rate is calculated at 1.7% according to CPI statistics. This may seem like an odd place to start, but if something is financed with a loan of any kind, inflation plays into the hands of the debtor. For instance, if someone takes a 30 year mortgage, the final payment will be worth 1/3 of the original payment. This is because inflation has a cumulative effect, and it’s one of the reasons most loans have an interest rate. So, when considering financing a custom pool, know that it is actually cheaper to pay it back in installments than all at once. The next concept that we ought to examine is known as opportunity cost. Opportunity cost is the idea that any dollar spent today cannot be invested to create a profit. For example, USA Today estimates that the average American pays roughly $10,000 in personal taxes per year. If we use this number and apply the current market average rate of return of 7.91 percent, that one year’s payment of $10,000 costs $96,463 thirty years later. When we understand this concept, it almost seems as though paying for such a massive investment-like a gunite pool, in cash, is counter intuitive. So how does one take advantage of the way money works in order to better enjoy their home?
I believe the most efficient way is to finance your swimming pool through your home. If you have lived in your home for a number years, there may be some equity that has accumulated, and so if you refinance to take a long term loan against your home, you can use the money to pay for construction costs and improve the value of your home immediately. The long term nature of a home loan and the current rate on a mortgage, hovering in the mid 3s, will actually play in your favor. You will be able to construct your new pool with the banks money, so you will avoid the opportunity cost, and then the debt will be rolled into your home. But because of your new custom pool, the house will actually appreciate to the value of the new pool. This means that inflation will also kick in, making your payment to the bank and new swimming pool much cheaper than if you used your own money. This can also be effective if you have an open line of credit on your home, if you are uncomfortable refinancing.
Nashville pool builders can also help, if your current debt to income ratio is too high for the banks liking. The interest rate is also higher on these options, and because the are not secured by an asset like your house, and the repayment terms are shorter, inflation does not work as much in your favor. You can also try an unsecured personal line of credit, but because of the short repayment terms and because a swimming pool does not produce cash flow of its own, these are perhaps the lest viable option.
Now that we know a little bit more about how money works, and how a custom pool helps both your net worth and your summer time enjoyment, what is stopping you from “jumping in”?
Financial Transitions educates clients on the whole story about how to have the freedom to control and access their wealth so they can save more and give more, for a better life. For more information on Financial Transitions, click here.