Accessory Dwelling Units (ADU) Loans

What is an ADU?

An accessory dwelling unit (ADU) is a separate living space attached to a single-family home. An ADU can be a secondary apartment or a house physically attached to property you already own. ADUs are also called in-law apartments, granny flats, or multigenerational homes.

What are the benefits of an ADU?

ADUs offer multiple benefits:

  • Potentially increasing property value & resale value

ADUs are a great way to add value to your property. If you ever decide to sell your home, potential buyers will view an ADU as an asset—as either a second living unit, a home office, gym, or guest house. Additionally, if you’re struggling to sell your home, building an ADU might increase its attractiveness to potential buyers.

  • Increasing privacy and accommodating guests

Privacy matters. ADUs offer an additional layer of privacy if you share your home with in-laws and grandparents, or if extended family comes to visit. Many families choose to invest in an ADU rather than put their in-laws or parents in a nursing home.

If your children commute to college, an ADU can be a great, inexpensive place for them to stay and also have their own space. Or if your college student just graduated, your ADU can give them a place to stay while they get on their financial feet.

As more companies transition to virtual work, it’s important to enhance your productivity. ADU’s can provide a dedicated, private space for a studio, workshop, office, or separate space for in-person client meetings.

  • Generating rental income

ADUs can generate both short-term and/or long-term rental income. For instance, if you live in a vacation town, list your ADU on a platform like Airbnb. The revenue from renting out your ADU can go directly towards your mortgage.

What are the cons of an ADU?

  • Losing basic storage space

Building an ADU on your property might mean you’ll lose basic storage space; however, in most cases, you’ll actually gain space with an ADU.

  • Paying construction costs

ADU’s aren’t always inexpensive. Constructing an ADU means you’ll need to pay for basic amenities to make the space comfortable and any other costs to meet your basic needs. That said, it’s entirely possible to construct an affordable ADU.

  • Potentially increasing property taxes

ADUs are assessed separately. They’re considered an addition to your property, and building an ADU won’t cause your home to be reassessed. Typically constructing an ADU will increase your annual property taxes by about 1% of the value of the ADU.

How much does an ADU cost?

ADU’s typically cost anywhere between $100,000 and $300,000.

Numerous variables affect the cost of your ADU.

These include:

  • Design
  • Structure
  • Materials
  • Energy, utility, and plumbing systems
  • Regulations and fees
  • Proximity to your main house


ADU’s aren’t cheap. Additionally, there’s usually a gap between your borrowing power (when using traditional mortgage products) and the cost of your ADU. Thus, financing your ADU can seem confusing or even impossible.

Fortunately, you have options when it comes to financing your ADU.

How can I finance my ADU?

Many borrowers use a home equity loan, a home equity line of credit, or a cash-out refinance to pay for a new ADU.

  • Home equity loans

Home equity loans are one of the most common ways to finance an ADU. These loans let you borrow a certain fixed amount of cash. That cash is backed by the equity you’ve built in your home. You’ll agree to repay this loan on a fixed payment schedule. The interest rates on these equity loans will be higher than the rate on your first mortgage. You’ll also incur closing costs and fees to cover an appraisal, lender fees, credit reports, etc.

  • Home equity line of credit

A home equity line of credit (HELOC) is a line of credit secured against your equity in your existing property. A HELOC gives you a revolving line of credit (up to a set limit) that you can use for large expenses, like building an ADU. For a HELOC, you’ll only pay interest on the cash that you’ve drawn on.

HELOC interest rates are variable, and they’ll be higher than your first mortgage. Most lenders will lend up to 80-85% of the value of your home (less your first mortgage).

  • Cash-out refinance

A cash-out refinance is a mortgage refinancing option that replaces your old mortgage with a new, larger mortgage. You’ll need to release a portion of the equity that you’ve already built in your home in order to pay for your ADU.

Although a cash-out refinance lets you consolidate both the capital you need for the construction of your ADU and your first mortgage, it requires that you’ve built significant equity in your first home. Most cash-out refinancing options let you access only about 80% of your home’s current value, which gives you significantly less borrowing power. Cash-out refinancing can also require you to change your mortgage provider—that means you might lose the lower interest rate you were locked into.

  • Construction loan

Construction loans let you borrow based on the projected future value of your home. If you have less equity in your home, a construction loan might help you borrow the money necessary for an ADU. However, it also means you’ll need to refinance and possibly lose a great fixed interest rate.

Construction loans tend to be a one-size-fits-all option. They aren’t tailored to your specific financial situation and needs.

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