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A practical guide to smarter financial decision-making that reveals the surprising advantages of HOA loans over special assessments—showing how borrowing can be the better path.
Written by
HOA Loan Services
Published on
28
Apr
2025
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Homeowner Association Boards face critical decisions when undertaking major capital improvement projects, often focusing heavily on expenditures like cost, vendor selection, and timing. An area often overlooked is whether to draw from the HOA’s reserve accounts or secure an HOA loan.
While conventional wisdom favors avoiding debt and using reserve funds or special assessments for simplicity or efficiency, this may not be the most financially prudent strategy.
The surprising truth: Borrowing money for a capital project can leave your HOA in a stronger financial position than using your reserve funds, even if your loan’s interest rate exceeds the projected investment return. This is true for your personal finances as well…we’ll cover this in more detail at the end.
This may sound counterintuitive, but it is indeed the case.
Capital projects are strategic investments in a community's future, whether it's a facility upgrade or infrastructure work. These initiatives will deliver benefits over 10, 15, or even 30 years.
Consider school upgrades, bridge repairs, or road improvements. Cities and towns typically borrow money according to the duration of those projects, thereby spreading the cost over the period during which people use them. This type of financing also ensures that those who benefit from the improvements share in the cost.
The concept of shared benefit is crucial for HOAs as well. Just as cities distribute costs over time, HOAs can utilize loans called HOA loans to fund long-term projects, such as roof replacements, common area renovations, or amenity upgrades.
Beyond the equitable distribution of costs and benefits, long-term debt can actually be less expensive over time than using cash — which is why it’s often considered 'good debt.'
One dollar today is worth more than one dollar tomorrow.
Inflation diminishes money's purchasing power over time. At a 3% inflation rate, $100 today will have the same value as $126 in ten years. According to data from the Federal Reserve Board, the annual inflation rate has averaged around 3% for the past decade.
Therefore, if you borrow $100 today, ignoring interest and amortization for now, you will only owe $100 for the life of the loan. Now, let’s discuss interest and amortization.
So, how do these financial strategies work in practice? It all comes down to two key concepts:
Let’s say your HOA has $1 million in reserves and is about to undertake a $1 million capital project. Consider these two choices: use the cash or finance the project with an HOA loan.
If you invest $1 million, earning 5% annually, that money grows through compounding. That means you’re earning interest not just on the original $1 million but also on the interest being earned. Thanks to compounding interest, the investment would have grown to almost $1.63 million by the end of ten years, generating more than $629,000 in interest earnings. Over time, the growth snowballs and accelerates. It is a powerful effect that rewards patience.
On the other hand, amortization works in reverse. If the HOA decides to finance the project with a loan at 7% interest over 10 years, it will repay both principal and interest. Each monthly payment includes both interest and a chunk of principal, i.e., amortization.
Monthly payments are constant; however, the percentage allocated to principal and interest changes each month. Over time, less payment is allocated to interest and more to the principal, and the balance gradually decreases to zero. At the end of ten years, the HOA will have paid roughly $1.5 million total—that’s just under $500,000 interest.
Below is a table and graph to show the comparison:
The top line of this chart illustrates how $1 million would grow at a rate of 5% over the next ten years, assuming a 0% inflation rate. The bottom line shows the cumulative payments that would be made, considering an HOA loan has an interest rate of 7% and a ten-year maturity.
Assumptions
Investment Rate of Return: 5%
HOA Loan Rate: 7%
Annual Loan P&I: $149,946
Loan Term/Investment Horizon: 10 years
Inflation Rate Assumption: 0%
There is one more angle to consider that can also tip the scales toward financing: inflation.
While inflation often receives a bad rap - with higher prices and reduced purchasing power - it has the opposite effect on borrowers.
Here’s why: when you take out a loan, the dollar amount you borrow and will repay is fixed, but the value of each repaid dollar slowly declines over time due to inflation. That means you are repaying the loan with cheaper dollars in the future.
Inflation erodes the real cost of debt, making it less expensive in today’s dollars over time, which makes financing large projects even more attractive.
It’s fair to note that inflation would also impact the future value of the invested reserves. In real terms, the purchasing power of those investments would also be reduced. However, the net advantage of financing through borrowing still holds because the impact of inflation tends to reduce the real burden of debt more dramatically than it affects compounded returns.
Below is a table and graph to show the comparison "assuming inflation is 3%":
This chart adjusts investment results and loan payments for inflation. The middle yellow line reduces the investment returns, while the bottom gray line reflects lower “real” loan payments.
Assumptions
Investment Rate of Return: 5%
HOA Loan Rate: 7%
Annual Loan P&I: $149,946
Loan Term/Investment Horizon: 10 years
Inflation Rate: 3%
The advantages extend beyond merely offsetting costs. Even with a loan interest rate greater than the investment yield, borrowing provides HOAs with the ability to:
While borrowing can offer significant advantages, it is crucial to acknowledge that it is not a universally acceptable solution. Several factors must be carefully weighed before deciding to finance a capital project with debt.
The prevailing interest rate can significantly influence the viability of borrowing. In a high-interest-rate scenario, the cost of debt can outweigh the advantages of preserving reserves and taking advantage of inflation.
The HOA’s overall financial health is a primary consideration. While borrowing can free up reserves, it also introduces a new financial obligation. The HOA must ensure it can comfortably service the debt without compromising its future financial stability.
This includes assessing the financial risk of borrowing and implementing sound practices to ensure reserves are invested wisely.
Strong governance and oversight are necessary to ensure the responsible use of borrowed funds and prudent management of investments.
Often, an HOA board allows individual owners to either participate in a loan or pay their pro-rata share in advance. In essence, an individual homeowner's decision mirrors that of the HOA. Individual owners should consider:
Paying upfront means an immediate cash outlay, which a homeowner could otherwise invest. The potential return that money could have earned is the opportunity cost of paying upfront. Conversely, financing through HOA assessments means paying less over time, allowing an owner to potentially earn a return on the unspent money in the interim.
If a unit owner chooses to finance their share through HOA fees, they will be paying with future dollars that have less purchasing power. Even if the total nominal amount paid is the same, the real cost (today’s dollars) will be lower through financing.
Some owners have the liquidity or means to pay upfront and avoid future payments regardless of the financial impact. Others may need or prefer to spread the cost over time.
Investing funds rather than paying upfront can carry investment risk. Individuals have varying degrees of financial discipline and risk tolerance.
It’s a trade-off between paying now and potentially missing out on investment gains versus paying over time with cheaper dollars and incurring interest (either explicitly or implicitly in the form of higher assessments).
Before liquidating reserve accounts or selling off personal investments for a project, conduct a thorough financial analysis. A strategic loan may represent the most advantageous approach. A well-considered financing strategy can enhance financial flexibility and yield greater long-term returns.
Many owners are quick to argue that they don’t want debt, so they skip over the strategic analysis.
Strategic borrowing can be a valuable tool for homeowners' associations (HOAs) for long-term capital projects. By protecting reserves and leveraging inflation, HOAs can optimize financial flexibility and potentially achieve greater long-term financial success.
To determine the most appropriate funding strategy for your HOA’s capital projects, seek guidance from an experienced financial professional who can analyze your specific circumstances and help you decide what’s best for your HOA.
Contact us if you’d like to see a free, customized analysis of your specific situation.
Our team is here to help. Reach out to one of our specialists today and we will be happy to help you walk through the process of obtaining an HOA loan for your community.
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