How to Pay for an ADU: Every Route, With the Real Cost of Each

Updated September 2026. Interest rates move, so treat every number below as a reference point and get a current quote before you plan around it.

Related from Renova Built: ADU construction, handled in house on one contract.

Almost nobody pays cash for an ADU. In Southern California roughly one homeowner in five does, and everyone else uses one of five ADU financing options: a HELOC, a home equity loan, a cash-out refinance, a construction loan, or a loan that counts the ADU’s future rental income toward what they qualify for.

Financing an accessory dwelling unit typically comes down to using home equity or a specialised loan product. This is the honest comparison of each, including the one most homeowners have never heard of.

First, the number you are financing

Most ADU construction projects in Los Angeles, Orange, and Ventura counties land between roughly $150,000 and $500,000 depending on type and size. A garage conversion sits at the low end because the structure already exists. A new detached ADU project sits at the high end because you are building from the foundation up.

Our current ranges by size are on the ADU cost page. Get a real number for your property before you talk to a lender, because the loan amount changes which financing option makes sense. The key factors every lender weighs are your home equity, the project costs, and the intended use of the unit.

What the ADU earns, and whether it covers the payment

This matters before you pick a loan, because the rent is what services the debt.

In Los Angeles, a one bedroom ADU commonly rents for somewhere around $2,200 to $2,800 a month, and a garage conversion ADU frequently clears $2,000 a month. Over time, a well built unit can add on the order of $300,000 in equity to a property in a strong Los Angeles market, though that figure varies enormously by neighbourhood.

Run your own numbers against your monthly payments rather than a builder’s average. If the rent covers the payment, the financing question gets much easier.

Option 1. HELOC, the one most people use

A home equity line of credit is the most common ADU financing route in Los Angeles, and it is not close. Industry data puts it at roughly half of all accessory dwelling units built.

The reason is one number: your current mortgage rate.

If you bought or refinanced between 2020 and 2022, you are probably carrying a first mortgage in the 3s. A HELOC lets you borrow against your home equity as a second mortgage and leave that first mortgage completely alone. That is the single biggest factor in ADU financing today, and it is why an equity line of credit beats a cash-out refinance for many homeowners even at a higher rate.

• How it works. The lender approves a line of credit against your equity. During the draw period you take funds as the build progresses and make interest only payments on what you have actually drawn.
• Borrowing power. HELOCs commonly allow borrowing against home equity up to roughly 80% to 85% of your home’s value, minus what you still owe. Insufficient equity is the usual reason this route fails.
• Rate structure. Usually variable, tied to an index, so your monthly payments can move. Some lenders offer a fixed rate lock on part of the balance.
• Where rates sat in 2026. Broadly in the 6.5% to 7% range in California, with credit unions often pricing below big banks. Interest rates and repayment terms vary significantly between loan types, so compare more than the headline number.

Best for: homeowners with substantial equity and a low first mortgage they do not want to touch.

Option 2. Home equity loan, the fixed rate cousin

Home equity loans provide a lump sum at a fixed interest rate, repaid over a set term. Same collateral as a HELOC, different shape.

You give up flexibility, since you pay interest on the whole amount from day one rather than drawing as you go. What you get is certainty: a single monthly payment that does not move. On a fixed price ADU project, a home equity loan often makes more sense than a HELOC, and plenty of homeowners choose one purely to avoid rate risk.

Best for: a fixed price project where you want predictable monthly payments.

Option 3. Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new, larger permanent mortgage and hands you the difference in cash.

It is clean, it is one loan, and the rate is usually fixed for 30 years. The problem in 2026 is arithmetic. If you hold a sub-4% first mortgage, refinancing means surrendering that rate on your entire balance, not just the new money. For most California homeowners who bought before 2022, that trade is bad enough to rule it out by itself.

Best for: homeowners whose current mortgage rate is already at or above today’s rates. Closing typically takes four to six weeks.

Option 4. Construction loans and renovation loans

Construction loans disburse funds in stages as construction progresses, rather than handing you everything up front. Money is released as ADU construction hits milestones: foundation, framing, rough-in, finish. You make interest-only payments during construction on what has been drawn, which matters over a nine month build. Construction loans then convert to permanent mortgages once the ADU is complete.

The important variant is the renovation loan that underwrites against projected future value rather than today’s value. Two names worth asking for:

• FHA 203(k). A renovation loan that can require as little as 3.5% down, which makes it one of the few genuine low down payment routes into an ADU.
• Fannie Mae HomeStyle. Similar principle, conventional rather than FHA, financing based on the property’s value once the work is complete.

If you do not have enough equity today, these are often the only routes that work, because the lender is lending against what the property will be worth once the accessory dwelling unit exists.

Best for: larger detached builds, and homeowners who are equity poor now but will not be afterwards.

Option 5. Loans that count your future ADU rental income

This is the one almost nobody knows about, and it is often what makes a marginal project work.

Fannie Mae guidelines explicitly allow ADU rental income to be considered for mortgage qualification, and participating lenders can count a portion of your projected rental income when deciding how much you qualify for. You do not need a signed tenant. You need a market rent appraisal for the unit you are planning to build.

The practical effect is that the ADU helps pay for itself inside the underwriting, not just after it is finished. If a lender declined you on debt-to-income, ask specifically whether they can use projected rental income from a new ADU. Not every lender does it, and the ones that do will not always volunteer it.

Best for: homeowners whose constraint is income rather than equity.

What about personal loans and unsecured loans?

ADU financing can include personal loans, and for most projects they are the wrong tool.

Unsecured loans are not tied to your property, so approval is quicker and there is no appraisal. The trade is the rate, typically well into double digits, and shorter terms that push monthly payments up hard. On a $250,000 project the math rarely survives contact with a calculator.

Where personal loans genuinely help is filling a small gap, twenty or thirty thousand dollars, when the main financing is already in place.

Government programs and grants

There is no statewide grant taking applications. CalHFA’s ADU Grant Program offered up to $40,000 toward pre-development costs, and its $100 million in funding was fully allocated. It closed in December 2023 and has not reopened.

Other public options exist, though most are outside Los Angeles. San Diego is the clearest example: the San Diego Housing Commission offers construction loans up to $250,000, with the condition that the ADU stays affordable for seven years. That trade, cheap money for a rent restriction, is the shape most local government programs take.

Some local municipalities run their own pilot program or financial assistance tied to affordable housing commitments, and certain federal housing grants through HUD can apply. These come and go with local budgets, so ask your city directly.

If you are seeing ads suggesting a statewide grant is available, read is there still a California ADU grant first. CalHFA itself warns that anyone offering to get you that grant today is running a scam.

How to choose, in four questions

1. What is your current mortgage rate? Below about 5%, protect it with a HELOC or home equity loan. At or above today’s rates, a cash-out refinance is back on the table.
2. Do you have enough equity? Plenty, and an equity loan is straightforward. Insufficient equity, and you need a renovation loan underwritten against future value.
3. Is your constraint equity or income? If income, ask about counting projected rental income under Fannie Mae guidelines. This changes the answer more than people expect.
4. Do you want certainty or flexibility? Fixed rate home equity loans give predictable payments. A HELOC’s draw period gives flexibility and interest only payments while you build.

What a lender will ask you for

• Plans and a defined scope of work, which is why a fixed price contract helps
• Your contractor’s license and insurance, ours is CSLB B #1149349
• A construction budget and draw schedule
• An appraisal, often both as-is and as-completed
• A market rent estimate, if projected income potential is being counted

A vague “starting at” quote is not a scope of work, and lenders know the difference.

Common questions

What is the best way to finance an ADU?

For most California homeowners with equity and a low existing mortgage, a HELOC or a home equity loan. Leaving the first mortgage untouched is usually worth more than a slightly better rate on a refinance. If equity is thin, a renovation loan underwritten against future value is the better route.

How much would a $100,000 HELOC cost per month?

During the draw period, making interest only payments, a $100,000 balance at around 7% runs roughly $580 a month. Once repayment begins and you are paying principal too, the payment rises substantially depending on term. Ask any lender for a full amortisation schedule, not just the draw period number.

How long can you finance an ADU?

Home equity loans commonly run 10 to 20 years. A cash-out refinance resets you to a 30 year permanent mortgage. Construction loans are short, often about a year, then convert to permanent financing once the unit is complete.

Can I get a personal loan for an ADU?

You can, but unsecured loans carry much higher interest rates and shorter terms than anything secured by your home. They work as a small gap filler, not as primary funding.

Do I need 20% down for a construction loan?

Not always. An FHA 203(k) renovation loan can require as little as 3.5% down, and lenders underwriting against completed value may count your existing equity rather than requiring cash. Ask early, because it decides whether you need savings at all.

Is the interest tax deductible?

Interest on home equity borrowing used to substantially improve the property securing the loan may be tax deductible, subject to limits. Whether it applies to you depends on your situation, so confirm with a tax advisor rather than a contractor.

How much would it cost to build a 600 square foot ADU?

It depends on whether it is a conversion or new construction. Current ranges by size are on our ADU cost page, and a garage conversion at that size costs considerably less than a new detached build.

The honest part about rates

Every rate here is a reference point from 2026 and will be wrong eventually. What does not change is the logic: protect a low first mortgage, match the loan structure to the length of your build, and ask about projected rental income if income is your binding constraint.

If you want the financing conversation to be useful, bring a real construction number rather than a range off a website. We will give you a fixed price for your property, and you can take it to any lender you like. See our ADU financing overview or book a free consultation.