Home equity loan
A home equity loan is a simple way to finance an Accessory Dwelling Unit (ADU), but expect higher interest rates currently. Primary residences can have up to 80-90% Loan-To-Value (LTV) ratio. You can access a credit line of up to $160K if your home is appraised at $700K and your current loan is only $400K. You can draw down the credit line as needed and are charged interest only on the amount used.
Construction Loan
A construction loan is an excellent option for financing your ADU if you have limited equity in your home or your existing loan value is near the conforming limit of $977,500. It covers the building costs and then converts into an adjustable-rate mortgage (ARM) after construction is complete. You only have to pay interest during construction, and these loans are available for both owner-occupied and rental properties.
Cash-Out Refinance
Fixed Rate Second Position Loan
There is a new loan product available which is based on the value of your home after you add an ADU (Accessory
Dwelling Unit). The loan doesn't require refinancing of your existing loan, and it comes with terms that extend up to 20 years. Unlike a construction loan, there are no "draws", and the entire loan amount is received upfront. Once the renovation is complete, an appraiser visits your home to issue a certificate of completion.
Renovation Loan (203K or Homestyle)
There is a new loan product available which is based on the value of your home after you add an ADU (Accessory Dwelling Unit). The loan doesn't require refinancing of your existing loan, and it comes with terms that extend up to 20 years. Unlike a construction loan, there are no "draws", and the entire loan amount is received upfront. Once the renovation is complete, an appraiser visits your home to issue a certificate of completion.
Home Equity Conversion Mortgage (HECM, ages 62+)
A construction loan is an excellent option for financing your ADU if you have limited equity in your home or your existing loan value is near the conforming limit of $977,500. It covers the building costs and then converts into anadjustable-rate mortgage (ARM) after construction is complete. You only have to pay interest during construction, and these loans are available for both owner-occupied and rental properties.