In partnership with ADU IT.
Financing an Accessory Dwelling Unit (ADU), also sometimes called a granny unit, can be confusing. We're here to help!
For information on the different ways to finance the construction of an ADU, please see below.
If you have a fair amount of equity in your property, you may be able to do a cash out refinance to pay for your ADU. It is common for most people, subject to income and credit qualification, to be able to get a new maximum loan amount of 80% of their current property value. For example, if your home is appraised for $400k, then your maximum new loan amount would be $320k. If you owe $200k on your property then you could cash out up to $120k ($320k loan minus $200k owed). Don't forget that there are always closing costs involved as well.
If you don't have enough equity to do a cash out, you may consider doing a renovation loan. The appraised value on a renovation loan is based on the "after improved value." This means that the appraisal will be based on the value of your home AFTER the ADU is added. These loans are a little bit more complex than your typical refinance, as there are inspections and construction draws and other elements involved. However this could be the right option for you.
Home Equity Lines of credit are an additional loan (typically the 2nd loan) attached to your property ON TOP of your current mortgage. A HELOC typically has a higher interest rate than a complete new mortgage like the cash out option, but could make sense if the interest rate on your original mortgage is much lower than current rates. For some people and their specific situation this might be their best option.
