A $150,000 to $450,000 ADU budget costs about $1,195 to $3,584 a month on a 20-year home equity loan at the 7.35% national average as of September 11, 2026 (ADU Wizard payment math). If you hold a low first mortgage, a HELOC or home equity loan is usually the cheapest route; cash-out refinancing and construction loans win only when equity is thin or your current rate is high.
Most of the homeowners I build for do not pay cash, and the loan they pick ends up mattering about as much as the finish package. The trouble is that every lender page explains the products and nobody shows you the bill. So this page does the arithmetic: three real ADU budgets, four loan products, the monthly payment and the total interest on each, and when each one is the wrong call.
Rates here are the same dated planning averages our ADU financing guide uses, as of September 11, 2026. They move weekly, so treat every payment below as a planning number, not a quote.
Quick Answer: Which ADU Loan Fits You
Start with your equity, your current rate and how the money needs to arrive. That narrows four products to one or two before you ever talk to a lender.
| Your situation | Credit picture | Timeline | Usually best |
|---|---|---|---|
| You own the home, hold a low first-mortgage rate, and will still have 15% to 20%+ equity after the ADU loan | Solid credit and debt-to-income | Money needed in stages over 6 to 12 months | HELOC |
| Same equity, but the scope and bid are locked | Solid credit and debt-to-income | One lump sum is fine | Home equity loan |
| Your current rate is at or above today's, or you own the home free and clear | Must qualify for a new first mortgage | Can wait for a full refinance close | Cash-out refinance |
| Little equity today (a recent buyer), or a big ground-up detached build | Must qualify on the finished value and the plans | Plans and a contractor bid in hand before you apply | Renovation or construction-to-permanent loan |
The equity line comes from how lenders cap combined loan-to-value, usually somewhere around 80% to 85% of the home's value across every loan secured by it. Our financing guide walks theusable-equity math if you want to run your own number first.
The Three Budgets I Run Through Every Loan
Each example budget is tied to what our cost engine prices for a real scenario, so the loan math sits on a build cost you could actually face. Your city moves these a lot; theLos Angeles ADU cost guide and theSan Jose ADU cost guide show how far, and our detached ADU cost by size shows how square footage moves the two detached budgets.
| Example budget | What it buys (cost engine, estimate) |
|---|---|
| $150,000 conversion | A 450 sq ft garage conversion at California's state average: our engine's point estimate is $149,877 (range $112,408 to $187,346). |
| $300,000 detached | A 1,000 sq ft detached ADU at the national average: our engine's point estimate is $300,000 (range $225,000 to $375,000). |
| $450,000 California detached | An 800 sq ft detached ADU at California's state average, with a cushion: our engine's range is $327,600 to $546,000, point $436,800. |
HELOC for an ADU
A home equity line of credit is a second lien that you draw against as the build progresses. That matches how an ADU actually gets paid for: a deposit, then foundation, framing, rough-in and finish milestones over six to twelve months. You only pay interest on what you have drawn, and your first mortgage stays exactly where it is.
On the $300,000 budget at the 7.29% variable average, a fully drawn line costs about $1,823 a month during a typical 10-year interest-only draw period. Here is the part that catches people: when repayment starts, the same balance amortizes over 20 years and the payment jumps to about $2,378. And because the rate is variable, both numbers move with the market.
It is the wrong tool if a payment jump would genuinely hurt your household, or if your line is sized so tightly that a 15% overrun leaves you short mid-build. I would rather see a homeowner open a line with room in it and not use it than run dry with the walls framed.
Home Equity Loan for an ADU
A home equity loan is the same second lien, paid out as one lump sum at a fixed rate. At the 7.35% average over 20 years, the $300,000 budget runs about $2,389 a month, and it never changes. That predictability is the whole appeal.
The catch is that you pay interest on the full amount from the day you close, even though your contractor will not need most of it for months. On a nine-month build that is real money spent on idle cash. It is the right call when your plans, bid and scope are locked; it is the wrong one while you are still deciding between an 800 and a 1,000 square foot unit.
Cash-Out Refinance and the Rate-Lock Tradeoff
A cash-out refinance replaces your whole first mortgage with a bigger one at today's rate, and hands you the difference. On the ADU money alone it looks cheap: $1,847 a month for $300,000 at 6.25% over 30 years.
That number hides the expensive part. Take an illustrative homeowner with a $400,000 balance at 3%. Repricing that balance to 6.25% raises the payment on the money they already owed from about $1,686 to $2,463, roughly $776 a month, before a single dollar goes to the ADU. Honestly, I have watched that one decision eat most of a new unit's rental income for years.
Cash-out makes sense in two cases: your current rate is already at or above today's, or you own the home outright. Otherwise a second lien is cheaper, and it is not close.
Construction and Renovation Loans
These are the products that lend on what the property will be worth when the ADU is finished, the after-repair or as-completed value. That is why they work for owners who bought recently and have little equity today. Fannie Mae's HomeStyle Renovation and Freddie Mac's CHOICERenovation fold the work into one first mortgage, and FHA's 203(k) does the same for attached ADUs only. A construction-to-permanent loan is the standard answer for a ground-up detached build that renovation limits will not fit.
Money comes out in draws. The lender releases each one only after an inspector confirms the milestone is done, which is slower and more paperwork than a HELOC but is also a real protection against a contractor who gets paid ahead of the work. During the build you pay interest on what has been drawn. I model that at no less than the 7.35% home equity average, because construction pricing runs higher; on the $300,000 budget over a 9-month build that is at least $8,269 in total, an estimate. Then the loan converts to a normal mortgage.
Two things to know going in. These are first-lien products, so if you already have a low-rate mortgage, the same repricing problem as a cash-out refi applies. And no lender will close one without approved plans, a licensed contractor's bid and an appraisal of the finished value, so they are wrong for anyone who has not done the design work yet.
For that contractor's bid, our builder lists check each builder's state license or registration: the best ADU builders in California page links every California city list, and we also cover ADU builders in Oregon, ADU and DADU builders in Washington and the best ADU builders in Massachusetts.
Can Projected ADU Rent Help You Qualify?
Often, and this changed the math for a lot of homeowners in the last two years. The current rules:
- Fannie Mae. The Selling Guide's rental income rules (updated September 2, 2026) carve out an exception for principal residences with an accessory unit. Income from one ADU on a one-unit primary residence can count on a purchase or limited cash-out refinance, at 75% of gross rent, capped at 30% of your qualifying income. There is no landlord education requirement, but with under 12 months of property management experience the ADU income is capped at your housing payment.
- FHA. Mortgagee Letter 2023-17 counts 75% of the rent from an existing ADU, or 50% of projected rent from a new attached ADU built with a Standard 203(k), capped at 30% of total effective income.
- Freddie Mac. Guide Section 5306.1 allows ADU rental income on a one-unit primary residence on a purchase or no-cash-out refinance: 75% of the rent, the same 30% cap, and no income from an illegal ADU. Per Freddie's ADU fact sheet (checked October 2026), a purchase also needs landlord education for at least one borrower unless one of you has a year or more of property management experience.
Lenders do not all apply these the same way, so print the citations and bring them. To estimate the rent you would be counting, our ADU rental income guide by city pairs HUD's local rent figures with our build costs.
Payment Comparison: Three Budgets, Four Loans
Principal and interest only. Taxes, insurance, fees and rate changes are left out, so read these as the floor, not the bill. Total interest assumes you carry each loan to the end of its term.
| Budget | Product | Rate (as of September 11, 2026) | Term | Monthly payment | Total interest | Wrong choice when |
|---|---|---|---|---|---|---|
| $150,000 conversion | HELOC | 7.29% variable | 10-yr draw, 20-yr repay | $911 interest-only, then $1,189 | $244,758 | When a payment jump at the end of the draw period would hurt, or the build overruns your line |
| $150,000 conversion | Home equity loan | 7.35% fixed | 20 years | $1,195 | $136,721 | When your scope is not locked, since you pay interest on the full lump sum from day one |
| $150,000 conversion | Cash-out refi (ADU portion) | 6.25% fixed | 30 years | $924 | $182,487 | When your current first mortgage is below today's rate, because the whole balance reprices |
| $150,000 conversion | Construction-to-permanent | 7.35%+ during build, then 6.25% | 9-mo build, then 30 years | About $4,134 total build interest, then $924 | $186,622 | When the project is small enough for a home equity product, or you have no plans and permits yet |
| $300,000 detached | HELOC | 7.29% variable | 10-yr draw, 20-yr repay | $1,823 interest-only, then $2,378 | $489,517 | When a payment jump at the end of the draw period would hurt, or the build overruns your line |
| $300,000 detached | Home equity loan | 7.35% fixed | 20 years | $2,389 | $273,441 | When your scope is not locked, since you pay interest on the full lump sum from day one |
| $300,000 detached | Cash-out refi (ADU portion) | 6.25% fixed | 30 years | $1,847 | $364,975 | When your current first mortgage is below today's rate, because the whole balance reprices |
| $300,000 detached | Construction-to-permanent | 7.35%+ during build, then 6.25% | 9-mo build, then 30 years | About $8,269 total build interest, then $1,847 | $373,243 | When the project is small enough for a home equity product, or you have no plans and permits yet |
| $450,000 California detached | HELOC | 7.29% variable | 10-yr draw, 20-yr repay | $2,734 interest-only, then $3,568 | $734,275 | When a payment jump at the end of the draw period would hurt, or the build overruns your line |
| $450,000 California detached | Home equity loan | 7.35% fixed | 20 years | $3,584 | $410,162 | When your scope is not locked, since you pay interest on the full lump sum from day one |
| $450,000 California detached | Cash-out refi (ADU portion) | 6.25% fixed | 30 years | $2,771 | $547,462 | When your current first mortgage is below today's rate, because the whole balance reprices |
| $450,000 California detached | Construction-to-permanent | 7.35%+ during build, then 6.25% | 9-mo build, then 30 years | About $12,403 total build interest, then $2,771 | $559,865 | When the project is small enough for a home equity product, or you have no plans and permits yet |
Read the total interest column carefully. The HELOC looks like the most expensive line, but only because this table assumes you pay nothing but interest for ten years and then stretch the balance over twenty more. Pay principal during the draw period and it drops fast. The cash-out row, meanwhile, looks cheapest per month and leaves out the repricing cost on your existing balance described above, which is usually the bigger number.
Mistakes That Stall ADU Financing
- Applying before you have a real budget. Lenders size the loan to a number; get yours from a bid or our cost calculator, then add soft costs and a contingency.
- Sizing the loan to the contractor bid. Design, engineering, permits and utility work sit outside most bids. Our financing guide lists them.
- Assuming the appraisal will cooperate. Renovation and construction loans hinge on the finished value. A thin comparable set can shrink the loan.
- Choosing a product before checking your first-mortgage rate. That one number decides whether a refinance is even on the table.
- Counting on a grant. Programs open and close. Our ADU grants by state page says which are live today.
- Borrowing before the permit path is clear. A loan that closes before your city says yes is interest on a project that might change shape.
Frequently Asked Questions
What is the best loan for an ADU?
For most homeowners who already hold a low first mortgage, a HELOC or fixed home equity loan is the cheapest way to borrow, because neither touches that first mortgage. On a $300,000 budget at the September 11, 2026 averages, a 20-year home equity loan runs about $2,389 a month. If you have little equity, a renovation or construction-to-permanent loan that underwrites on the finished value is usually the better fit.
Is it hard to get a construction loan for an ADU?
Harder than a HELOC, yes. A construction or renovation lender wants approved plans, a licensed contractor's bid, a draw schedule and an appraisal of the finished property before closing, and the process takes weeks longer. The tradeoff is that you borrow against what the property will be worth, not what it is worth today.
Can I use a HELOC to build an ADU?
Yes, and it is the most common way I see it done. You draw as the build hits milestones and pay interest only on what you have drawn, about $1,823 a month on a fully drawn $300,000 line at 7.29%. Plan for the repayment period, when the same balance costs about $2,378 a month over 20 years.
Can future ADU rent help me qualify for the loan?
Sometimes. Fannie Mae, Freddie Mac and FHA all have paths to count rent from an ADU on a one-unit primary residence, generally at 75% of the rent and capped at 30% of your qualifying income. The details differ by channel and transaction type, so bring the citations below to your lender.
Should I refinance to pay for an ADU?
Only if your current rate is at or above today's, or you have no mortgage. Refinancing reprices your whole balance: on an illustrative $400,000 balance, moving from 3% to 6.25% adds about $776 a month before you have borrowed a dollar for the ADU.
How do I get money to build an ADU if I have no equity?
Look at renovation loans that lend on the as-completed value (Fannie Mae HomeStyle, Freddie Mac CHOICERenovation, or FHA 203(k) for attached units), a construction-to-permanent loan, or a local program. Grants are rarer than the internet suggests; our ADU grants page lists what is actually open by state.
If I were financing an ADU today with a low first mortgage, I would open a HELOC with room in it, draw it down as the milestones land, and pay principal from the first month. If I had just bought the house, I would go straight to a renovation lender with finished plans. Either way, the first step is the same: find out what your ADU actually costs, then go back to the ADU financing guide with that number.
Education, not financial advice. I am a builder, not a lender or advisor. Program terms and rates move, so confirm every figure against the official source linked next to it before you count on it.