With cash-out refinancing, you borrow more money than the outstanding balance of your existing mortgage to obtain the difference in cash.
Refinancing is one of the best ADU financing options to help pay for the construction loan to build an ADU. You can get a lump sum of money to cover the building costs by tapping into the home equity lines of your house.
If you have a large fixed amount of equity in your house and want to make renovations or additions, most cash-out refinances may be advantageous.
Before making a choice, it's crucial to think about the ramifications and long-term expenses of cash-out ADU financing.
Home Equity Loans and Lines of Credit (HELOC)
The equity of a property can be used as security for some types of construction loans, such as home equity loans and lines of credit (HELOC). The credit line or home equity line may be used to help with the financing of the ADU's construction expenses.
You can utilize an equity line of credit to borrow a particular sum of money to cover the costs of building, and your home's equity will serve as security for the new loan or existing loan.
HELOCs, one of the financing options, which do not have high-interest rates than other types of lending options, can offer a flexible and cheap method to fund the building of an ADU
Renovation Loan (203K or Homestyle)
Homeowners can use renovation financing or RenoFi loans to fund their remodeling initiatives. The maximum loan amount under Fannie Mae Homestyle for detached ADU construction is $976,500.
The property’s worth with the ADU may be estimated to determine this lump sum payment. 85% of the future value of a primary residence and an investment property portfolio are often offered as part of a renovation loan.
Homeowners can combine renovation loans for real estate acquisition. Refinancing is an option for getting better terms or a different loan amount after construction.
For many homeowners who have low home equity or a home value below $977,500, a home ADU loan may be a viable solution for financing an ADU construction project.
Construction finance can cover the first mortgage and construction costs, and once construction is complete, the finance can become a fixed-rate mortgage ARM that essentially refinances the primary mortgage, which you can later use to get rental income.
During the construction phase, typically, borrowers can only make interest rate payments on ADU loan amounts until renovation projects commence, without any principal payments. This is one of the loan options that are available for both property owners and rental properties.
If you already have a sizeable amount put into retirement, you can consider taking out a lump sum from your retirement account. We highly recommend consulting with a CPA or tax expert to understand what tax liabilities come into play with this option.
Alternatively, you could also consider borrowing from your retirement account if allowed. Some retirement accounts let you borrow up to 50% of the total funds in your account.
We here at ADU.Works have partnered with a number of banks and lenders to find you the right financing option. Be sure to contact us for more information on how to find the right ADU loan that best works for you and your ADU goals.