How to Get Funding for Your ADU Construction Project
Building an accessory dwelling unit (ADU) is an investment in both your property and your future. Whether you plan to rent it out, use it for family, or create additional space, securing the right financing can help you move forward confidently. At MF ADU, we understand the financial aspects of ADU construction and offer guidance on the best options available for homeowners.
1. Home Equity Loans
A home equity loan is one of the most common ways to fund an ADU. You borrow against the equity in your home, which means lower interest rates than unsecured loans.
Benefits include:
Competitive interest rates
Fixed repayment terms
Potentially large loan amounts
Home equity loans allow you to access a lump sum of money for construction, making them a good fit for homeowners with sufficient equity built in their properties.
2. Home Equity Line of Credit (HELOC)
A HELOC offers a revolving line of credit based on the equity in your home. With a HELOC, you can withdraw funds as needed during the project and pay interest only on the amount you use.
HELOC advantages include:
Flexibility in using funds
Interest-only payment options during the draw period
No need for a large lump sum
This option works well for homeowners who want to keep their options open and only borrow what they need as the construction progresses.
3. Cash-Out Refinance
A cash-out refinance involves refinancing your existing mortgage to access more funds for your ADU project. You’ll replace your current mortgage with a new one that has a larger principal, allowing you to use the difference for your build.
Why choose cash-out refinance?
Possible access to lower interest rates
Use the funds for ADU construction
You only deal with one loan and payment
This option is ideal if interest rates are favorable, and you want to consolidate your financing under a single mortgage.
4. Construction Loans
A construction loan is specifically designed for building projects. These loans typically cover the cost of labor, materials, and permits. The benefit of construction loans is that they are tailored for building projects, with funds disbursed in stages based on project milestones.
Advantages of construction loans:
Funds released in stages
Designed specifically for construction needs
Flexibility in adjusting the loan amount as necessary
Construction loans can be ideal if you want a loan that’s structured around your ADU project.
5. Personal Savings or Cash
If you have savings set aside, using them to fund your ADU project can be one of the easiest ways to avoid paying interest or dealing with loan approvals. Although it requires upfront capital, using personal savings offers the most flexibility and peace of mind.
Benefits of using cash savings:
No interest payments
Full control over the budget
No debt or ongoing monthly payments
This option works best if you have enough savings and prefer to avoid additional debt.
Did you know?
Did you know? Some local governments in California offer financial incentives and rebates for homeowners who build energy-efficient ADUs, helping reduce construction costs.
Explore Financing Options with MF ADU
Whether you choose a home equity loan, construction financing, or a different option, we’re here to guide you through the process. At MF ADU, we specialize in creating high-quality prefabricated ADUs that fit your budget and lifestyle.
Explore our financing options to help get your ADU project off the ground.
Frequently Asked Questions
What’s the best way to finance an ADU?
The best option depends on your property value, credit score, and financial goals. Many homeowners use home equity loans or HELOCs.
How much of my home’s equity can I borrow for an ADU?
Home equity loan lenders typically allow you to borrow up to 80% of your home’s appraised value.
Can I use a construction loan for a prefab ADU?
Yes. Construction loans can be used for prefab ADUs, especially if the project requires site preparation or foundation work.
What if I don’t have enough equity for a loan?
Consider a cash-out refinance or a personal loan. Alternatively, using personal savings may be a great option if you have the funds available.
Are there any government programs for ADU financing?
Yes. Some cities offer grants, rebates, or tax incentives for building ADUs, especially if they meet energy efficiency or affordability criteria.