How to Finance an ADU: 6 Ways to Pay for a Backyard Home

An ADU typically costs more than most homeowners have in cash, so financing is part of nearly every project. The right option depends on how much equity you have and whether you want one loan or two.

1. Home equity line of credit (HELOC)

The most common choice. You borrow against your home's equity as you need it, paying interest only on what you draw. Flexible and relatively cheap, but the rate is usually variable.

2. Cash-out refinance

Replace your mortgage with a larger one and take the difference as cash. Makes sense if current rates are at or below your existing rate; less attractive if refinancing would raise your rate.

3. Renovation loan (FHA 203k / Fannie Mae HomeStyle)

These let you borrow against the home's projected value after the ADU is built, which helps if you don't yet have enough equity.

4. Construction loan

A short-term loan that funds the build in stages, then converts to or is replaced by a permanent mortgage. More paperwork, but designed for ground-up projects.

5. ADU-specific loans

A growing number of lenders and credit unions offer products that underwrite the future rental income of the ADU, letting you borrow more than your current equity alone would allow.

6. Builder or prefab financing

Many prefab ADU companies partner with lenders to bundle the unit and the loan. Convenient, but compare the rate against a HELOC before committing.