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Your guide to financing an ADU

Navigate the seas of financing with confidence – from equity tapping to strategic loans, discover how to fund your dream ADU or garage makeover.

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Enter your project estimates to calculate your monthly payment.

$ Maximum value ranges from 1$ to 1000000$
$ Maximum value ranges from 1$ to 1000000$
% Maximum value ranges from 0.1% to 20%
Maximum value ranges from 0.1 to 35 years
Total monthly payment

$1,255

Principal

$150,000

Interest

$151,118

Total Payable

$301,118

1ST FINANCE WAY

1. Cash-Out Refinancing

A Cash-Out Refinance allows you to refinance your existing mortgage at a higher value than what you currently owe, then pocket the difference to fund your ADU.

How it works

This option consolidates your existing mortgage and ADU financing into a new, single loan, potentially with better terms and a lower interest rate.

Pros

  • Immediate access to a lump sum of money for your ADU project.
  • Potentially lower interest rates compared to personal loans or credit cards.
  • Consolidated debt with a single monthly payment for both your mortgage and ADU financing.
  • Mortgage interest may be tax-deductible if used to significantly improve the homeowner’s property.

Cons

  • Involves closing costs, adding to the upfront expense of the ADU.
  • Could lead to higher monthly payments due to the increased loan amount.
  • Extends the debt period, potentially increasing the total interest paid over the life of the loan.
  • Risk of foreclosure if unable to meet the new loan payments.

Summary

Cash-out refinancing is best for homeowners with significant equity and the desire for a straightforward loan structure. Yet, it might not suit those with limited equity or who cannot afford increased monthly payments.
2ND FINANCE WAY

2. Renovation Loan

Renovation loans are government-backed financing options designed to fund your home improvements, including ADU construction, based on the future value of your property.

How it works

These loans consider the projected value of your home post-renovation, potentially allowing you to borrow more than with a standard loan.

Pros

  • Access to funds based on the future, post-improvement value of your home.
  • Can significantly increase the property’s value and utility.
  • Consolidates purchase or mortgage costs and renovation expenses into one loan.
  • Competitive interest rates compared to other financing methods.

Cons

  • The application process can be more complex and demanding.
  • May feature higher interest rates and fees to offset the lender’s increased risk.
  • Budget overruns could require securing additional funding beyond the loan amount.
  • Using the home as collateral puts the property at risk if the loan cannot be repaid.

Summary

A renovation loan is ideal for those planning substantial improvements like ADU construction, offering increased borrowing potential. However, its complexity and potential for higher costs warrant careful consideration.
3RD FINANCE WAY

3. Construction Loans

Construction Loans are tailored for new building projects, including ADUs. They finance the construction phase and can be either single-close loans or two-phase loans with separate construction and mortgage phases.

How it works

These loans cover construction costs disbursed in stages, based on completed work, then typically convert to a standard mortgage.

Pros

  • Custom-tailored for construction projects with payment disbursements aligned with project milestones.
  • Interest-only payments during construction for lower initial costs.
  • Enables the building of a custom ADU to specific preferences and requirements.

Cons

  • Often come with higher interest rates due to the temporary nature and higher risk.
  • Stringent qualification criteria including higher down payments and credit scores.
  • Managing loan disbursement and construction timelines can be complex.
  • Risk of needing to secure a mortgage at completion if the loan doesn’t automatically convert.

Summary

Construction loans are best suited for those directly managing ADU construction projects needing payment flexibility during the build. However, the complexity of these loans and potential for higher costs require diligent planning and financial stability.
4TH FINANCE WAY

4. Jumbo Cash-Out Refinance

Jumbo Cash-Out Refinance loans are for amounts exceeding the conforming loan limits set by Fannie Mae and Freddie Mac, providing substantial funds by tapping into home equity.

How it works

These loans replace your existing mortgage with a larger loan, offering the difference in cash for projects like ADU construction.

Pros

  • Access to larger amounts of funds suitable for substantial projects.
  • Competitive interest rates can offer financial advantage over other high-limit loans.
  • Consolidates primary mortgage and project financing into a single loan.

Cons

  • Increases overall debt burden with a larger loan amount.
  • Reduces home equity, potentially affecting future borrowing power.
  • Involves closing costs, which can be substantial for larger loans.
  • Risk of foreclosure if unable to keep up with the larger loan payments.

Summary

Jumbo Cash-Out Refinance is an option for homeowners needing significant funds beyond conventional loan limits, offering a streamlined single-loan solution but at the cost of increased debt and potential risk.
5TH FINANCE WAY

5. Reverse Home Equity Conversion Mortgage (HECM)

Reverse Home Equity Conversion Mortgages allow homeowners aged 62 and older to convert part of their home equity into cash without monthly mortgage payments, suitable for funding ADU construction.

How it works

Based on the homeowner’s age, home value, and equity, this loan provides funds without requiring repayment until the homeowner moves, sells, or passes away.

Pros

  • Eliminates monthly mortgage payments.
  • Provides flexible cash use for ADU projects.
  • Loan amount is capped at the home’s value, protecting against underwater loans.
  • Typically tax-free funds that don’t affect most retirement benefits.

Cons

  • Loan balance increases over time due to accruing interest.
  • Decreases inheritance for the homeowner’s heirs.
  • Higher upfront costs compared to other loan types.
  • Could affect eligibility for need-based government programs.

Summary

HECMs offer a unique opportunity for seniors to finance ADU construction without current income constraints but at the expense of accruing debt and reduced home equity for heirs.
6TH FINANCE WAY

6. Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit offers a flexible credit line based on the home’s equity, acting similarly to a credit card but with the advantage of a secured loan’s lower interest rates.

How it works

Homeowners can draw on this line of credit as needed, paying interest only on the amount used, typically at variable rates.

Pros

  • High flexibility for funding ADU construction with as-needed cash access.
  • Lower interest payments during the draw period.
  • Potential tax deductions on interest payments if used for home improvements.
  • Generally lower interest rates compared to unsecured credit options.

Cons

  • Variable interest rates can lead to payment fluctuations.
  • Risk of overspending due to the revolving nature of the credit.
  • Failure to repay can lead to foreclosure.
  • Requires substantial home equity to qualify.

Summary

HELOCs offer a versatile financing option for ADU projects, providing easy access to funds with lower interest rates. However, the variable rates and potential for overspending require disciplined financial management.
7TH FINANCE WAY

7. Custom Financing

Custom Financing involves designing a financial solution tailored to the specific requirements of the homeowner and the ADU project.

How it works

This approach can include various financing methods, such as personal loans, construction loans, and renovation loans, each selected based on the borrower’s financial status and the project’s unique needs.

Pros

  • Tailored solutions provide precise financing that aligns with project requirements and borrower circumstances.
  • Offers potential access to funds that accurately reflect the projected value of the ADU, possibly enhancing borrowing limits.
  • A broad spectrum of financing products available, catering to a wide range of needs and preferences.

Cons

  • Some options may carry higher interest rates, particularly unsecured loans that do not require collateral.
  • The process of selecting and securing custom financing can be complex, requiring a detailed understanding of various financial products.
  • The flexibility and variety of options might lead to overborrowing, potentially causing financial stress.

Summary

Custom Financing is a flexible and adaptable method for funding ADU projects, allowing homeowners to carefully match their financing to both their financial situation and project specifics. While offering the potential for a highly customized approach, it demands thorough research and careful planning to navigate the complexities and avoid financial pitfalls.

Answers to your most common ADU building questions

Your ADU top questions answered
Start with a free ADU estimate
As leading ADU builders in San Diego, we provide comprehensive services covering every aspect of ADU construction. From initial design consultations to obtaining permits, construction, and finishing touches, we handle every step to ensure a smooth and successful project.
Getting started with ADU construction is easy with It’s ADU. Simply contact us to schedule a consultation, where we’ll discuss your needs, preferences, and budget. From there, our team will work closely with you to develop a customized plan that brings your ADU aspirations to life.
Yes, an Accessory Dwelling Unit (ADU) can be a good investment. ADUs offer financial benefits like rental income and increased property value, making properties more attractive to buyers. They also provide tax advantages and are versatile, serving as rental units, guest quarters, or home offices. While initial construction costs and regulatory compliance are considerations, the long-term financial returns and flexibility make ADUs a worthwhile investment.
Adding an Accessory Dwelling Unit (ADU) to your property in San Diego can increase its value by up to 30%, with some cases seeing boosts of 50% or more. The increase depends on the ADU type (detached, attached, or interior), size, quality, and the local housing market. Detached ADUs typically offer the highest value increase due to their independence, while conversions like garages may offer a higher return on investment due to lower construction costs. Local housing demand also significantly influences the added value of an ADU.
Building an ADU in San Diego typically takes 8 to 12 months. The process includes a design phase (1-2 months), a permitting phase (3-4 months), and a construction phase (4-6 months). The exact timeline can vary depending on the type of ADU and specific site conditions.

Building an ADU in San Diego typically costs

300 sq ft: $120,000 – $175,000
Fixed costs such as design permits and high-quality, multifunctional solutions.
500 sq ft: $180,000 – $250,000
Economies of scale apply, with costs influenced by finishes and design complexity.
800 sq ft: $250,000 – $350,000
Larger footprint allows for standard construction methods, potentially lowering costs.
1,000 sq ft: $330,000 – $465,000
Costs vary widely based on location, materials, and labor.
1,200 sq ft: $415,000 – $580,000
Maximum potential for design complexity and high-quality finishes.

In San Diego, single-family residential lots can have one ADU and one JADU, plus an additional affordable ADU and a bonus market-rate ADU, potentially totaling four ADUs. Multifamily lots can have two detached ADUs, plus conversions of non-livable spaces like storage areas and garages into additional ADUs. Special conditions, such as being in transit priority areas, may allow for even more ADUs. Always check local regulations for specific requirements.
In San Diego, an Accessory Dwelling Unit (ADU) can be up to 1,200 square feet, whether detached or attached. Detached ADUs up to 800 square feet are exempt from lot coverage requirements, and detached ADUs can be built up to 16 feet high or higher, depending on zoning regulations. Attached ADUs can be up to 25 feet high or follow the height limitations of the primary dwelling. Always consult local zoning laws for specific requirements.
An Accessory Dwelling Unit (ADU) is a secondary housing unit on the same lot as a primary residence. ADUs, also known as granny flats, in-law units, or backyard cottages, can be detached, attached, or part of the existing structure like a converted garage or room addition. They are self-contained with their own kitchen, sleeping area, and bathroom. ADUs provide rental income, affordable housing, or living space for family members, and their construction is governed by local zoning laws. Despite the costs, ADUs add property value and offer financial benefits.
Yes, you can build an ADU on your property in San Diego if it meets local regulations. Generally, ADUs are allowed in residential zones with an existing or proposed single-family or multi-family dwelling. You can have one ADU and one Junior ADU (JADU) for single-family homes and more for multi-family properties. ADU floor plans must adhere to size limits, setbacks, and parking regulations, and the property owner is not required to live on-site. Consult the City of San Diego’s Development Services Department for detailed requirements and assistance.
Yes, depending on local regulations, an Accessory Dwelling Unit (ADU) can serve as a primary residence. Typically, ADUs are secondary, independent living spaces on the same lot as a primary dwelling. However, in some jurisdictions, an ADU can initially function as the primary residence, especially if built on a vacant lot or converted to the main house later. It’s essential to check local zoning laws and regulations to understand your area’s specific requirements and opportunities.

To finance an ADU, homeowners can explore several options: 

Home Equity Loans and HELOCs: Borrow against your home’s equity. Home equity loans provide a lump sum, while HELOCs offer a flexible line of credit.
Cash-Out Refinancing: Replace your existing mortgage with a larger one, using the difference to fund the ADU.
Construction Loans: Specifically for building projects, these loans convert to a regular mortgage upon completion.
Government Programs: Look for local grants and loans, like California’s CalHFA ADU Grant Program, which offers up to $40,000 for ADU development.

One drawback of an ADU is the significant construction cost. Building an ADU can be expensive, with costs varying based on the type, such as a garage conversion versus a detached unit. Expenses for permits, taxes, utility connections, and construction can quickly add up. Despite potential rental income or increased property value, the initial financial outlay and ongoing maintenance costs are important considerations for homeowners.

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