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Everything You Need to Know About Financing an ADU

We know that there is a lot that goes into moving forward on your ADU project. Permits, design, deciding the features necessary, zoning codes, and more, 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 best 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 stop you from disregarding the project altogether. When you have the right financing, you’ll be able to design and build a great unit that will bring in great rental income if you so choose.  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.  ADORE Homes are successful in providing financing in many situations where others could not.   

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 HELOC (home equity line of credit) 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 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 principle 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 to 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. 

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 concludes 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.

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