Many people find it hard to make a decision about building an accessory dwelling unit as an addition to their main house, and what makes it so challenging to get down with the project is the financial side of it. It is not a secret that building ADUs can become quite a costly thing, but the majority of potential ADU owners would appreciate some precision. 

For this reason, we have gathered together the most common financing options related to building an ADU, and we hope learning about them will make your life easier when you start considering building an accessory dwelling unit and budgeting is one of your main concerns.

ADU financial options

Since any type of renovation and remodeling, and especially building an ADU, will require quite a lot of financial effort, it is not always the case that homeowners have a sufficient amount of money on their hands. But you should not worry about that if you find yourself in a situation like that. Nowadays, there are quite a lot of opportunities to get the necessary amount without saving up for a long time. 

Here you can find a list of financing options available for you to choose from when you decide on building an ADU:


HELOC is the abbreviation for Home Equity Line of Credit, and it is a real lifesaver for those who lack cash when building accessory dwelling units. 

What this type of credit offers is the amount of money based on your equity that is going to be broken down into two bits. The first part is for you to make use of and invest during the building process, whereas the second one is what you will have to pay back once all the work has been completed. 

Many opt for HELOC because this type of loan is convenient in terms of interest. You are only required to pay interest for the sum that you have spent. On top of that, you will not need to pay back right away – a HELOC loan offers extended periods of time to return the amount you have borrowed and may allow you up to 10 years to do so. 

Another benefit of HELOC is that the payments that you need to return are not usually as high as one might expect. That means if you decide to rent out your newly built ADU, you will be able to keep the difference between the payments and still make some profit from your property. 

Cash-out refinance

This credit option is perfect for those who pay the mortgage. Here, your existing mortgage will be replaced, and you will be free to use the remaining difference to fund the ADU building. This is especially advantageous in case your home equity is big enough, if the level of interest that you are paying at the moment is the same or higher than those you will get if you choose the refinancing option.

Renovation loan

It may happen that your home equity is relatively small to get HELOC or cash refinance, but you should not get desperate because there are also renovation loans to help you out. You need to keep in mind, though, that this type of loan requires collateral, and this will be your current house. 

Please remember that if you refuse to provide collateral, it may result in higher interest rates and tighter rules, including income conditions, in order to get this type of loan. 

Anchored loan

Anchored loans are another opportunity for property owners whose equity is relatively small to get the required amount of money to build an ADU.

There are some similarities between HELOC and cash-out refinance, such as two time periods with different functions, using the money received for building, and paying the amount you took back. The difference between HELOC and an anchored loan is that with the latter, you will be returning money to the lender based not on the first estimate of your house value but on the value of your new property, which includes a newly-built accessory dwelling unit. 

However, there is an advantage to this type of loan, and this is stable interest rates that will not change with time. This makes anchored loans a safe option, especially if you are sure that you can pay the money back in the designated amount of time.

Other financial solutions

If you consider the options described above not really suitable for you, there are other alternatives that can help you get the necessary funding. 

As an example, the most straightforward solution is to ask your friends and family for financial assistance. You may feel a little uneasy when asking your relatives for a loan, but in fact, our nearest and dearest know everything about us, unlike banks, and will be happy to help, assured that you will pay everything back once you feel more stable. 

Another option for building an ADU could be getting a personal loan from direct lenders. A personal loan was a great solution when other alternatives failed to have worked out. Be careful about the terms and conditions of such loans, though, because many of them offer quite high interest rates. 

If you are the one who is totally against borrowing money either from a bank or a close friend, you might want to think about the money you have saved for retirement or investment. Also, if you have a piece of property that is not currently in use, you could consider selling it to get the money for an ADU.

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