Construction Loan for an ADU
If you’re wondering how to finance an ADU, you have a few options. As a homeowner, you are either paying off a mortgage as we speak or own your property outright. Either way, you’re eligible to borrow against the value of what you own.
Home Equity Loan
One of the most common approaches is a home equity loan. If you own enough of your property outright (generally at least 10-20%) and it’s deemed valuable enough, a bank will allow you to borrow against that property up to an agreed-upon amount — they’re not going to let you borrow a million bucks against a home that’s worth half a million. As with any, an ADU loan has interest payments involved, and since your property is your collateral, if you default on it, it means foreclosure.
Another option is a cash-out refinancing of your mortgage. Instead of allowing you to borrow in small chunks when needed, refinancing provides a lump sum payment, which in turn gets added back on to your monthly mortgage payment.
One of the many benefits of building an accessory dwelling unit is that it increases your property value, which makes ADU construction loans another viable option in some cases.
You’ve got a few choices, for how to finance an addition on your own, each of which is going to cost you money, either upfront or long-term. It can be daunting — but remember what we said about working with the right team? Elizabeth Alejo is here to relieve you of all the risk, hard work, and financial burden.