# Financing Your ADU: Loans, HELOCs, and Options
Most homeowners don't pay cash for their ADU - they borrow against their home's equity. If you have $100,000+ in equity and decent credit, you can likely get approved for ADU financing. The monthly payment on a $180,000 loan is around $1,600-1,800, which rental income often covers from day one. You don't need to be wealthy or have perfect credit to make this work.
The question isn't "can I afford to build an ADU?" - it's "which financing option makes the most sense for my situation?" Let's break down what actual homeowners are using and why.
## Home Equity Loan: The Most Common Choice
**What it is:** You borrow a lump sum against your home equity at a fixed interest rate. Think of it like a second mortgage specifically for your ADU project.
**Current rates:** 7-9% for 10-15 year terms (as of early 2025)
**Why homeowners choose this:**
- You get all the money upfront to pay your builder
- Fixed monthly payment you can budget around
- Rates are typically lower than personal loans or credit cards
- Interest may be tax-deductible (talk to your accountant)
- You get all the money upfront to pay your builder
- Fixed monthly payment you can budget around
- Rates are typically lower than personal loans or credit cards
- Interest may be tax-deductible (talk to your accountant)
**Real example:**
"We borrowed $185,000 at 7.5% for 15 years. Payment is $1,715/month. We rent the ADU for $1,850. The ADU is basically paying for itself while we build equity." - Austin homeowner
"We borrowed $185,000 at 7.5% for 15 years. Payment is $1,715/month. We rent the ADU for $1,850. The ADU is basically paying for itself while we build equity." - Austin homeowner
**You'll likely qualify if:**
- You have at least 20% equity in your home after the loan
- Credit score of 680+
- Debt-to-income ratio under 43%
- Stable employment
- You have at least 20% equity in your home after the loan
- Credit score of 680+
- Debt-to-income ratio under 43%
- Stable employment
Most lenders want to see that you'll still have equity cushion after borrowing. If your home is worth $500,000 and you owe $250,000, you could likely borrow $150,000-$200,000 for an ADU.
## HELOC: More Flexibility, Variable Rate
**What it is:** A line of credit you can draw from as needed during construction. Like a credit card secured by your home, but with much lower rates.
**Current rates:** 8-10% variable (tied to prime rate)
**Why homeowners choose this:**
- Only pay interest on what you've drawn, not the full amount
- Good if your costs might vary or you're doing phases
- Can refinance to fixed loan later if rates drop
- Some flexibility to pay down and re-borrow during draw period
- Only pay interest on what you've drawn, not the full amount
- Good if your costs might vary or you're doing phases
- Can refinance to fixed loan later if rates drop
- Some flexibility to pay down and re-borrow during draw period
**Real example:**
"Our builder quoted $165,000 but we wanted flexibility for upgrades. We got a $200,000 HELOC. We drew $170,000 total and only pay interest on that. Now we're making payments of $1,400/month." - Portland homeowner
"Our builder quoted $165,000 but we wanted flexibility for upgrades. We got a $200,000 HELOC. We drew $170,000 total and only pay interest on that. Now we're making payments of $1,400/month." - Portland homeowner
**The tradeoff:**
Variable rates mean your payment can increase if interest rates rise. Some homeowners start with a HELOC during construction, then convert to a fixed home equity loan once the ADU is done and they know the final cost.
Variable rates mean your payment can increase if interest rates rise. Some homeowners start with a HELOC during construction, then convert to a fixed home equity loan once the ADU is done and they know the final cost.
## Cash-Out Refinance: Replace Your Whole Mortgage
**What it is:** You refinance your entire mortgage for more than you owe and pocket the difference for your ADU.
**Why homeowners choose this:**
- Can make sense if current mortgage rates are close to your existing rate
- One single mortgage payment instead of mortgage + second loan
- Potentially lower overall interest rate than a second loan
- Can extend loan term to lower payment
- Can make sense if current mortgage rates are close to your existing rate
- One single mortgage payment instead of mortgage + second loan
- Potentially lower overall interest rate than a second loan
- Can extend loan term to lower payment
**When this works best:**
- Your current mortgage rate is 6.5%+ and you can refinance at similar or lower
- You want to simplify to one payment
- You're okay resetting your mortgage timeline
- Your current mortgage rate is 6.5%+ and you can refinance at similar or lower
- You want to simplify to one payment
- You're okay resetting your mortgage timeline
**Real example:**
"We owed $280,000 at 6.8%. We refinanced for $450,000 at 6.5% and used $170,000 for the ADU. Our total payment went up $800/month, but the rental income is $1,700/month, so we're still cash-flow positive." - San Diego homeowner
"We owed $280,000 at 6.8%. We refinanced for $450,000 at 6.5% and used $170,000 for the ADU. Our total payment went up $800/month, but the rental income is $1,700/month, so we're still cash-flow positive." - San Diego homeowner
**The catch:**
Refinancing has closing costs ($3,000-$6,000+) and resets your loan term. If you're 15 years into a 30-year mortgage, refinancing starts the 30-year clock over.
Refinancing has closing costs ($3,000-$6,000+) and resets your loan term. If you're 15 years into a 30-year mortgage, refinancing starts the 30-year clock over.
## Construction Loan: For Ground-Up Builds
**What it is:** Short-term loan that converts to permanent financing after construction. Less common for ADUs but some lenders offer them.
**Why some homeowners use this:**
- Interest-only payments during construction (6-12 months)
- Converts to standard loan once ADU is complete
- Builder gets paid in stages as work progresses
- Interest-only payments during construction (6-12 months)
- Converts to standard loan once ADU is complete
- Builder gets paid in stages as work progresses
**The tradeoff:**
More paperwork, typically higher rates during construction phase, and not all lenders offer these for ADUs. Most homeowners find home equity loans or HELOCs simpler.
More paperwork, typically higher rates during construction phase, and not all lenders offer these for ADUs. Most homeowners find home equity loans or HELOCs simpler.
## Personal Loan or Savings: The Less Common Routes
**Personal loans:**
Rates are typically 10-15%, much higher than home equity options. Only makes sense for smaller projects or if you can't qualify for home equity lending.
Rates are typically 10-15%, much higher than home equity options. Only makes sense for smaller projects or if you can't qualify for home equity lending.
**Paying cash:**
About 15-20% of ADU owners pay cash. Advantage: no monthly payment. Disadvantage: ties up significant capital you might invest elsewhere.
About 15-20% of ADU owners pay cash. Advantage: no monthly payment. Disadvantage: ties up significant capital you might invest elsewhere.
Some homeowners use a hybrid - pay $100,000 cash, finance $80,000 - to keep payments lower while maintaining some investment flexibility.
## What Lenders Actually Care About
**Your equity position:**
They want to see 15-20% equity remaining after the loan. An ADU increases your home value, so they're lending against an improving asset.
They want to see 15-20% equity remaining after the loan. An ADU increases your home value, so they're lending against an improving asset.
**Your income:**
Most lenders use a debt-to-income ratio of 43% or less. If you plan to rent the ADU, some lenders will count 75% of projected rental income toward your qualifying income.
Most lenders use a debt-to-income ratio of 43% or less. If you plan to rent the ADU, some lenders will count 75% of projected rental income toward your qualifying income.
**Credit score:**
680+ gets you approved at most lenders. 740+ gets you better rates. Below 680, you'll need more equity or might pay higher rates.
680+ gets you approved at most lenders. 740+ gets you better rates. Below 680, you'll need more equity or might pay higher rates.
**Appraisal:**
Your home needs to appraise high enough to support the loan amount. In hot markets, this is rarely an issue. Some lenders will consider the "as-completed" value including the ADU.
Your home needs to appraise high enough to support the loan amount. In hot markets, this is rarely an issue. Some lenders will consider the "as-completed" value including the ADU.
## How to Actually Get Approved
**1. Know your numbers before applying:**
- Check your credit score (free at Credit Karma, Experian, etc.)
- Calculate your home equity (recent sales in your neighborhood give you value estimates)
- List your monthly debts and income
- Check your credit score (free at Credit Karma, Experian, etc.)
- Calculate your home equity (recent sales in your neighborhood give you value estimates)
- List your monthly debts and income
**2. Shop multiple lenders:**
Credit unions often have better rates than big banks. Local banks may understand ADU value better than national lenders. Get quotes from 3-4 lenders.
Credit unions often have better rates than big banks. Local banks may understand ADU value better than national lenders. Get quotes from 3-4 lenders.
**3. Tell them it's for an ADU:**
Many lenders have specific ADU loan programs now. Some will consider projected rental income. Don't just say "home improvement" - be specific.
Many lenders have specific ADU loan programs now. Some will consider projected rental income. Don't just say "home improvement" - be specific.
**4. Have basic plans ready:**
Lenders want to see this is real. A builder quote or preliminary plans show you're serious and help justify the loan amount.
Lenders want to see this is real. A builder quote or preliminary plans show you're serious and help justify the loan amount.
## What This Actually Costs You Monthly
Here's what homeowners are paying on typical ADU loans:
**$150,000 at 7.5% for 15 years:** $1,390/month
**$180,000 at 8% for 15 years:** $1,720/month
**$200,000 at 7.5% for 15 years:** $1,854/month
**$180,000 at 8% for 15 years:** $1,720/month
**$200,000 at 7.5% for 15 years:** $1,854/month
Many homeowners find rental income of $1,500-$2,200/month covers the payment plus expenses. Even if you're not renting it out, you're building $100,000-$200,000 in home equity while making payments.
## Start With What You Qualify For
You don't need to become a financing expert - you need to know roughly what you qualify for so you can plan your ADU accordingly.
**Quick next steps:**
1. Check if your property qualifies for an ADU [property checker link]
2. Use an online home equity calculator to estimate available equity
3. Talk to 2-3 lenders about ADU-specific programs
4. Browse builders to see realistic costs for your area [builder directory link]
1. Check if your property qualifies for an ADU [property checker link]
2. Use an online home equity calculator to estimate available equity
3. Talk to 2-3 lenders about ADU-specific programs
4. Browse builders to see realistic costs for your area [builder directory link]
Most homeowners find that once they see their equity position and talk to a lender, the financing piece is more straightforward than expected. The builders you talk to have seen hundreds of financing scenarios and can help you think through which option makes sense.
You're already doing the smart thing - researching before committing. Understanding your financing options now means you can move quickly when you find the right ADU design for your property.