The popularity of Accessory Dwelling Units (ADUs) has skyrocketed in recent years, especially in urban areas like Los Angeles. Whether you're looking to create a rental unit, a home office, or a space for a family member, building an ADU can be a wise investment that increases your property's value. However, one of the most common concerns for homeowners is “Can I Get a Loan to Build an ADU?”
Financing an ADU involves exploring a variety of loan options, each designed to cater to different financial situations and project scopes. In this article, we will guide you through the most common types of loans available for ADU construction, factors that impact loan interest rates, and financial assistance programs to help reduce your overall costs. Let’s dive into the world of ADU financing and help you navigate your way to making your ADU dream a reality.

Types of Loans for ADU Construction
When it comes to financing an ADU, there is no one-size-fits-all solution. Different types of loans are available depending on your existing home equity, the scope of your project, and whether you're looking to refinance or take out a new loan. Below are some of the most common options:
RenoFi Renovation Home Equity Loan
Allows homeowners to tap into the increased value of their property after the ADU is built.
Considers the "as-completed value" of your home, including the ADU, rather than the current property value.
A great option if you already have home equity and want to fund the entire ADU project without using personal savings.
Renovation Loan
A first mortgage that includes both the purchase price of the home and the cost of renovations, including the ADU.
Based on an estimate of the home's "as-completed value," factoring in the projected increase in value once the ADU is added.
Some loans also allow you to include projected rental income from the ADU to help qualify for a larger loan amount.
Construction Loan
A short-term loan is typically based on a percentage of the completed value of the ADU.
Funds are released in stages as construction progresses, and interest is only paid on the amount drawn.
Ideal for larger, more complex ADU projects, but requires detailed plans, permits, and estimates from a licensed contractor.
Cash-Out Refinancing
Allows you to refinance your existing mortgage for a higher amount and take the difference in cash to finance your ADU.
Often comes with competitive interest rates, but increases your overall mortgage and monthly payments.
A good option if you have significant equity built up in your home.
Home Equity Loans or Lines of Credit (HELOC)
A Home Equity Loan provides a lump sum based on your home equity, which is paid back in fixed installments.
A HELOC provides a revolving line of credit that you can draw from as needed.
Both options typically offer lower interest rates compared to personal loans, but require sufficient equity in your home.
Home Equity Investments
Involve selling a percentage of your home’s future appreciation in exchange for cash today.
No monthly payments or interest are required, but you’ll share a portion of the future equity.
Suitable if you don’t want to take on more debt but are willing to share future equity growth.
What Type of Loan is Best for ADU?
Choosing the best loan for your ADU project depends on several factors. Consider the following when selecting the right loan type:
Home Equity:
If you have significant equity in your home, home equity loans or lines of credit may be a cost-effective option.
For larger projects, a renovation loan or cash-out refinance may be more appropriate.
Loan Terms:
Fixed-rate loans offer stability, but adjustable-rate loans (ARMs) may come with lower initial rates.
If you plan on selling the home or refinancing within a few years, an ARM might be a good option.
Financial Situation:
If you plan to rent out the ADU, look for loans that allow you to include expected rental income as qualifying income.
Some renovation loans make it easier to qualify by factoring in rental income from the ADU.
Project Scope:
A smaller, straightforward garage conversion may qualify for a home equity loan.
Larger, standalone ADU projects may require a renovation or construction loan.
Factors Affecting ADU Loan Interest Rates
Several factors influence the interest rate you receive when financing your ADU. Consider these key factors:
Loan Type:
Fixed-rate loans tend to have slightly higher interest rates but offer stability.
Adjustable-rate loans (ARMs) may offer lower initial rates but come with the risk of increasing rates over time.
Market Conditions:
Economic factors like inflation, recession, and the interest rate policies set by the Federal Reserve can impact loan rates.
In times of economic uncertainty, interest rates may rise, which can increase the cost of your ADU loan.
Lender Policies:
Each lender has different risk assessments and loan policies, which can affect the interest rates they offer.
Always compare rates from multiple lenders to find the best deal for your project.
Financial Assistance Programs for ADU Construction
Some states and municipalities offer financial assistance for homeowners looking to build an ADU. For example:
California:
The ADU Grant Program offers up to $40,000 for planning and permitting costs.
Local programs may also offer grants or low-interest loans to help reduce the cost of building an ADU.
Check with your local government or housing authority to find out what financial assistance programs are available in your area.
Comparison of Lenders and Loan Options
It’s important to shop around and compare loan options to find the best deal for your ADU construction project. Here are some things to consider:
Interest Rates: Look for lenders offering the most competitive interest rates.
Loan Terms: Compare the length of the loan and repayment terms to ensure it fits your financial situation.
Additional Fees: Be aware of closing costs, origination fees, and any other charges associated with the loan.
Flexibility: Some loans allow you to include anticipated rental income from the ADU, making it easier to qualify for a larger loan.
Consider speaking with a lender who specializes in ADU financing to help navigate the options and secure the best rate.
Conclusion
Financing an ADU is a significant financial commitment, but with the right loan, it can be a worthwhile investment that adds both functionality and value to your property. Whether you choose a home equity loan, renovation loan, construction loan, or another option, it’s essential to understand the loan terms and consider how they align with your financial goals.
If you're ready to start your ADU project, don’t hesitate to contact Result Construction. We specialize in ADU design, Construction Services Elk Grove, offering tailored solutions that fit your needs and budget. Reach out to us today for all your construction needs, and let's turn your ADU vision into reality!
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