We know that there is a lot that goes into moving forward on your ADU project. Permits, design, zoning codes, deciding on the necessary features—the list of what needs to get done seems to never end. ADORE Homes was founded to help homeowners navigate this cumbersome process and, thanks to our wonderful clients, we have been producing exceptional results yet to be seen in the traditional stick-built construction business. ADORE Homes make things easy and very efficient for the client.
Without the proper financing, your project will likely come to an abrupt halt. With ADUs only recently becoming popular in California, lenders and banks are just now struggling to catch up to the growing demand. Specific ADU loans haven’t yet been developed.
This article will review the top ADU financing options so you can decide what might be the most suitable option for your goals and needs.
Earn Money Faster With These ADU Financing Options
Finding the best ADU financing options can be confusing, but it shouldn’t deter you from pursuing the project. When you have the right financing, you’ll be able to design and build a great unit that could bring in great rental income, should you decide to lease it out. ADORE Homes has access to top-tier lenders and mortgage brokers that can offer our clients the best available interest rates currently in the market. Time and again, we have been successful in providing financing in situations where others could not.
Navigating the intricate world of ADU financing might seem daunting, but rest assured, ADORE Homes is here to simplify the process. Our finance experts understand the nuances and intricacies of the lending landscape, enabling them to find the best financing solutions tailored to your unique situation. It’s not just about securing a loan; it’s about finding the right one that suits your financial objectives, making your dream of building an ADU a reality.
Our team is committed to ensuring you get competitive interest rates, optimal loan terms, and flexible repayment options that fit your budget. This expertise often leads to securing financing for clients who may have previously been denied. We take pride in our robust network of lenders and mortgage brokers, making it possible for us to secure better terms than most competitors can offer.
Furthermore, ADORE Homes believes in educating our clients about their options, empowering them to make informed decisions. We walk you through each step of the process, explaining the pros and cons of each financing option available. Whether it’s a home equity loan, a personal loan, or a renovation mortgage, we aim to equip you with all the necessary knowledge for a sound financial decision. Our mission is to make your journey to ADU ownership as smooth as possible, taking the stress out of the financing so you can focus on realizing your vision for the perfect accessory dwelling unit.
Keep reading as we walk you through some of your options to see which might work the best for you.
Home Equity Line Of Credit (HELOC)
Using home equity to finance the construction of an ADU is pretty standard. However, if you don’t have sufficient equity to borrow against, this option might not be the right one for you. Home equity loans, also known as second mortgages, allow you to borrow a fixed amount of money. This money is backed by the equity you have in your home, and then you repay it on a fixed agreed-upon schedule. The advantage is that you do not need to put any money down to be able to utilize the HELOC tool.
We should note that the interest rate on an equity loan is typically higher than your first mortgage rate and will most likely incur closing costs and other fees. However, today’s historically low interest rates still make this a very viable option for many of ADORE Homes clients.
A home equity line of credit (HELOC) will also allow you to borrow against the equity in your home and can provide a revolving line of credit up to a certain limit. With this option, interest is only payable on the cash that you have drawn on, typically over a period of up to 10 years. The interest rate with a HELOC is usually higher than your first mortgage and is usually not a fixed amount. Many lenders are willing to lend up to 85% of your home’s value (minus your first mortgage).
If you haven’t built up much equity or just recently purchased your home, these options likely won’t be viable for you. You probably won’t be able to borrow the amount you need to cover the costs required for your ADU construction.
Refinance Your Existing Mortgage
Another option that is similar to home equity financing is cash-out refinancing. Refinancing might be the best option for you as it allows you to change your mortgage provider entirely, get a lower rate, or consolidate your new project financing into your existing home loan. Cash-out refinancing means that the lender will look at your home’s current appraisal value and compare it with the principal value remaining on your current mortgage. For example, if your home has increased in value since you bought it, you might be able to refinance it for the current appraisal value and get cash out based on your new equity balance.
ADORE Homes will connect you with our trusted financing partners to get your refinancing process going quickly and smoothly, or you can also ask your current lender about whether you qualify for this option as an alternative to home equity financing. In any event, we always recommend our clients shop around in order to obtain the best interest rate available.
New Loan
One of the benefits of building an ADU is that it can increase your property value, which might mean that a construction loan is the best option for you. Banks will first assess your property’s value and then have an appraiser look at your construction plan and other factors to calculate how much your home will be worth after building an ADU. Once they determine that number, they’ll provide a percentage of the difference for you to use to finance your ADU. Your credit score, loan history, and the current market will affect how much you might qualify for.
A construction loan is indeed a feasible option, and its advantages extend beyond just increasing your property value. An ADU construction loan also offers flexibility in terms of repayment, with options such as interest-only payments during the construction phase, providing you with the financial bandwidth to manage your regular expenses alongside the project costs.
However, it’s crucial to understand that obtaining a construction loan isn’t a one-size-fits-all solution. It requires a solid construction plan and a proven ability to handle such a substantial financial commitment. Therefore, it’s essential to have a thorough blueprint of your proposed ADU, detailing the design, materials, cost estimates, and expected completion time. Lenders place immense importance on these factors while assessing the loan application.
In addition to the construction plan, lenders will also evaluate your financial stability, which includes your credit score, income level, and debt-to-income ratio. They will scrutinize your financial history to determine if you have a strong track record of repaying loans.
Bear in mind that while construction loans can be a great resource, they also have certain inherent risks. For instance, cost overruns or construction delays could lead to higher than expected expenses. Therefore, it’s crucial to have a well-laid plan and contingency budget in place. Additionally, construction loan interest rates often fluctuate with market conditions, which could impact your repayment costs.
Understanding these aspects will allow you to make an informed decision about whether a construction loan is the most appropriate option for your ADU project. In any case, ADORE Homes stands ready to guide you through these complexities, ensuring that you make a decision that benefits you both now and in the long run.
At ADORE Homes, We Handle Everything
When you need help getting the best ADU financing options, ADORE Homes can help. We handle every part of the process for you. We’ll start by assessing your site and then acquiring the necessary permits. Next comes the on-site preparation work, which includes the foundation, trenching, and utility hookups. Then we’ll deliver your finished ADU straight to your home and install it into your newly laid foundation. Plus, you’ll get us overseeing the entire process; there won’t be a bunch of third-party people you’ll have to deal with—you’ll only talk to Adore Homes experts.
Financing shouldn’t be the most challenging part of building an ADU—we can help! As we mentioned above, we have financing partners to ensure that your ADU fulfills your needs and gets you the space you need.
Accessory dwelling units are very popular in California, especially following January 2020 when the new ADU legislation was enacted. Now is the time to start planning for your future to help you build equity and increase your monthly profits. If financing is the only thing standing in your way, reach out to us, and let us show you a better way.