Building an ADU can be a great investment, whether it’s to create extra living space for family, generate rental income, or increase the value of your property. However, one common challenge for homeowners is figuring out how to finance your ADU construction. If you don’t have all the immediate capital needed, there are several financing options to explore. Let’s take a look.
Home Equity Line of Credit (HELOC)
A HELOC can be an excellent choice if you’ve owned your home for a while and have substantial equity. Lenders typically allow borrowing up to 80% of your home’s value, minus any existing mortgage balance. For example, if your home is worth $400,000 and you still owe $200,000, you may be eligible to borrow up to $120,000 through a HELOC. This option offers flexibility, as you can draw on funds as needed during the construction process and only pay interest on the amount you use.
Construction Loans
If you need significant funding, a construction loan could be the solution. These loans are designed specifically for building projects and are typically disbursed in stages as the construction progresses. Once your ADU is complete, the construction loan can often be rolled into a new mortgage, simplifying repayment. Talk to your bank to understand their terms and requirements for construction loans.
Short-Term Credit Options
For smaller funding gaps, short-term credit options such as personal loans or even credit cards might be helpful. These can be useful for covering unexpected costs during construction. However, keep in mind that these types of loans often carry higher interest rates, so it’s wise to prioritize paying them off quickly—especially before lower-rate loans like a HELOC or mortgage.
Family Resources
If your ADU is intended for a family member, such as an aging parent, consider discussing financial assistance with them. They may be willing to contribute to the upfront costs of building in exchange for having a personalized space to live. Family contributions can reduce the amount you need to borrow and may even help avoid high-interest loans.
Why an ADU is Worth the Investment
While the initial cost of building an ADU can seem daunting, the potential benefits make it a worthwhile investment. Not only can an ADU provide housing for loved ones, but it can also generate rental income or increase your property’s resale value. With the right financing strategy, you can make the process more manageable and start reaping the rewards sooner.
Get Expert Advice
Financing an ADU can feel overwhelming, but you don’t have to go through it alone. If you’d like a free consultation to discuss your financing options and get started on your ADU project, fill out our contact form today. We’re here to help make your dream a reality! We are not financial advisors – so please make sure you consult with your bank or financial advisor to see which option will work for you.
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