Financing is one of the biggest hurdles for ADU projects. The good news: there are more options than ever, including lenders that specialize in ADU construction. Here is how the most popular options compare.
Financing Options Compared
| Option | Best For | Typical Rate | Loan Amount | Pros |
|---|---|---|---|---|
| HELOC | Homeowners with equity | 7-10% variable | Up to 85% of equity | Flexible draws; interest-only period |
| Cash-Out Refi | Low existing rate locks | 6.5-8% fixed | Up to 80% LTV | Fixed rate; single payment |
| Construction Loan | New builds >$200K | 8-12% then converts | Up to 90% of project | Covers full build; converts to mortgage |
| Home Equity Loan | Fixed-rate preference | 7-9% fixed | Up to 85% of equity | Predictable payments |
| ADU-Specific Lender | ADU-focused programs | 8-11% | Up to $400K | Understands ADU projects; faster approval |
| Personal Loan | Small projects / JADUs | 10-15% | $25K-$100K | No equity needed; fast funding |
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Compare Rates Now →HELOC (Home Equity Line of Credit)
A HELOC is the most popular way to finance an ADU. It works like a credit card backed by your home equity — you draw funds as needed during construction and only pay interest on what you use.
Best for:
Homeowners with significant equity who want flexible access to funds during construction. Ideal for projects where costs may vary.
Construction Loans
Construction loans are designed specifically for building projects. They provide funds in stages (draws) as construction milestones are met, then convert to a permanent mortgage once the ADU is complete.
How it works:
Lender approves the full project budget. Funds are released in draws as work progresses. After construction, the loan converts to a standard mortgage at a permanent rate.
ADU Financing Tips
- Get your home appraised first — know your equity position before applying
- Factor in ALL costs: design, permits, utilities, landscaping, and a 10-15% contingency
- Compare at least 3 lenders — rates and terms vary significantly
- Ask about ADU-specific programs — some lenders factor future rental income into qualification
- Consider the after-repair value (ARV) — some lenders will use projected property value post-ADU
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