Financing an ADU starts with an estimated full project budget and a plan for when payments come due. This overview is educational — compare actual terms with a qualified lender before committing, and remember that borrowing against your home puts it at risk if you cannot repay.
HELOC: draw as work progresses
A home equity line of credit lets you borrow up to a limit and draw more than once. That can align with staged construction bills, but available credit, fees, and payment terms vary. Many HELOCs have adjustable rates, so model a higher payment and ask what happens when the draw period ends.
Home equity loan: a lump sum
Unlike a HELOC, a home equity loan generally disburses its funds at once. Ask when repayment starts, whether the rate is fixed or adjustable, and how the loan amount compares with the project budget — including costs not in a construction bid.
Cash-out refinance
This replaces the existing mortgage with a larger one. Compare the new rate, closing costs, repayment term, and total borrowing cost against keeping your current mortgage and using a separate loan.
Construction or renovation loans
Some lenders offer funds tied to construction milestones, with their own appraisal, contractor, draw, and inspection requirements. Ask how changes to the project or permit schedule affect access to funds.
Questions to take to a lender
How much can I borrow based on my circumstances? When do payments begin? Could the rate or payment change? What fees apply? What happens if permits or construction take longer than expected? Compare written loan terms, not just an advertised rate.