ADU Financing Options - Accessory Dwelling Units

Elevate Your Lifestyle with ADUs

As Accessory Dwelling Units and Backyard Cottages sweep across the nation like never before, more and more lenders are paying attention to what financing options they may be able to create in order to aid homeowners in funding their ADU build. The days are nearly gone where the only source of ADU funding is a hefty bank account. Instead, we’ll explore many of the common options people just like you have utilized to fund their ADU build.

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Traditional Mortgage Vehicles

The HELOC, or Home Equity Line of Credit is the most common of the funding options for ADUs. A HELOC is essentially a revolving line of credit that is based on the equity that you’ve built up in your home. This does NOT necessarily have to be the home at which your ADU will sit, as if you have multiple homes, sometimes it makes sense to draw from the equity in one home and redirect those funds to the improvement of another home. More often than not, HELOCS are are offered without fees or closing costs, which makes them an even more attractive option for funding your ADU. In today’s market of very low interest rates, even in some of the worst case scenarios HELOC rates and terms still look quite desirable. Furthermore, a HELOC can typically be refinanced AFTER the construction of the Accessory Dwelling Unit is complete so as to combine with the primary mortgage – thus reducing your monthly expenditure further. Lenders will typically lend up to 80% of the current property value – although some will go higher depending on circumstances.

Fixed Home Equity Loan or Second Mortgage

Unlike the HELOC, this option is, as the name implies, for a fixed amount of money. So, regardless of what the final cost of your ADU becomes, you will have borrowed a pre-determined amount already. Second mortgages are of course collateralized by the home itself, and are typically for terms SHORTER than 30 years (10-15 years is commonplace). A second mortgage will also have higher interest rates, as the risk for the lender is slightly higher (they take a second position as a lien-holder on the home, so if the borrower was to default on the home payments, the first (primary) mortgage/lien-holder would be the first to get paid). This type of loan does add additional (typical) closing costs such as the lender fees or “points”, credit report fees, title search fees, appraisal fees, and so forth.

Cash-Out-Refinance

This is an attractive solution for those who wish to take advantage of today’s low interest rates and have yet to do so. When utilizing a cash-out refinance to purchase/build an ADU, you’ll essentially be extracting the equity from your home WHILE restructuring the existing debt (if any) on your home. Now is a great time to refinance your home, as assuming you purchased your home years ago, you’re likely paying higher interest rates than the current market rates. Cash-out refinance terms (as they are first lien holder positions and therefore lower risk than HELOCs) are usually for 30 years and interest rates are optimal. Again, like the second mortgage, a cash-out refinance carries closing costs typical of most home loans.

Construction or Renovation Loans

What do you do if you have no or little equity in your home? That’s where options like this loan program come into play. The construction/renovation loan is a great option and does require us as the builder to take a more active role in the funding process, as you will likely be required to seek approval from the bank/financier based on the track record/history, and other fundamentals of the builder team. One of the reasons for this, beyond lender security, is that the construction loans are typically paid out in “draws”. In other words, monies are dispersed from the lender as they are required, and as such, interest and fees are based off the amount drawn (i.e. recalculated after every draw of funds). This is a good option for homeowners who have less than 20% equity in their home, and have a financing gap to cover construction expenses. By using the future appraised value of the property once the ADU is completed, the owner might have enough anticipated equity to qualify for the loan. Some construction loan rates are only marginally higher than traditional refinance rates (e.g. only by 0.125%). Banks often offer a construction/renovation loan with conversion to a permanent 30-year fixed rate mortgage loan after the ADU project is completed, all for one set of closing costs. Construction is defined as a ground-up project while renovation is considered renovation of an existing structure like creating a basement or garage apartment.

The beauty of the Accessory Dwelling Unit or Backyard Cottage is that the relatively low price point allows for very reasonable monthly payments regardless of loan term/length. Assuming your zoning allows, you can see how such things as an Airbnb rental can help to offset these costs!

Let's Get Building

Frequently Asked Questions About ADUs

What Are My Largest Costs?

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Elevate Your Lifestyle with ADUs

Explore Options

Traditional Mortgage Vehicles

Fixed Home Equity Loan or Second Mortgage

Cash-Out-Refinance

Construction or Renovation Loans

Let's Get Building

Frequently Asked Questions About ADUs

What Are My Largest Costs?

How Long Does It Take To Build?

What Does My ADU or Backyard Cottage Include?

What Am I Responsible For?

What About Ordering A Modular Kit?

Is Your Team In-House?

How Do I Insure My ADU?