ADU Financing: Loan Options, Costs and How to Choose

Key points

• The main ADU financing options are a HELOC, a home equity loan, a cash-out refinance, a construction or renovation loan, and cash.
• An all-in ADU budget includes design, the structure, permits, city fees, utility connections, site work and a reserve, plus property taxes after the build.
• The type of ADU you build (basement conversion, garage conversion, attached addition or detached new build) sets how much you need to borrow.
• Lenders generally want plans and a detailed budget before they commit funds, so a fixed price early in the process makes borrowing easier.
• Talk to a lender early, ideally while the design is being developed, so the loan and the budget are sized to the same number.

ADU financing options at a glance

Our overview of home remodel financing options covers how these loans work for any project.

HELOC and home equity loan

A HELOC or home equity loan lets you borrow against the equity you have built in your home, which makes them a common way to pay for an ADU when you have a lot of equity and a low-rate first mortgage you want to keep.

A HELOC works like a credit line you draw from as bills come due, which suits a build that is paid in stages. A home equity loan pays out one lump sum at a fixed rate, which suits a project with a firm price.

Cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger one and gives you the difference in cash to put toward the ADU. It can make sense if your current rate is higher than what you can get today, since you refinance the whole loan once instead of adding a second one.

If your current mortgage rate is lower than today's rates, refinancing the entire balance to fund an ADU can cost more over time than borrowing only what you need with a HELOC or home equity loan. Run both scenarios with your lender before you decide.

Construction and renovation loans

A construction or renovation loan releases money in stages as work is completed, and some programs size the loan on the home's value after the ADU is built instead of its value today. That can help if you do not yet have enough equity to borrow against.

Conventional renovation programs are one version of this. Fannie Mae publishes guidance on how its mortgage products treat accessory dwelling units, which is a useful reference when you talk to a lender about what a renovation loan can include.

These loans usually come with more paperwork, including plans, a contractor agreement and inspections before each draw. Our step-by-step guide to the renovation construction loan process walks through what to expect.

How lenders evaluate an ADU project

Lenders look at the same things they always do (your income, credit and equity), plus the project itself: the plans, the budget and who is building it. A clear scope and a fixed price give them something concrete to underwrite.

Many lenders also order an appraisal, and some renovation programs use the value of the home after the ADU is complete. Some lenders may also consider potential rental income from an ADU when they evaluate your application, but policies differ, so ask each lender how they treat it.

How design-build helps you finance an ADU

With design-build, one firm handles design, material sourcing and construction under one relationship and one master plan. That matters for financing because lenders and homeowners both want to know the price before the money is committed.

At Lamont Bros., the path runs from a virtual call with a design consultant to a home visit, a concept with renderings, a paid design retainer, a full design with 3D renderings and floor plans, and then a fixed-price construction contract. That fixed price gives your lender a firm number to work with, and jobs typically finish within 5% of the contract price, mostly because of client change orders.

Portland's ADU fee waiver and what it requires

Portland offers a system development charge waiver for new ADUs that are owner-occupied or rented month-to-month or longer. In exchange, the owner signs a binding 10-year covenant that no structure on the property, including the main house, will be used as a short-term rental. According to the City of Portland's ADU SDC waiver page, revoking the covenant or violating it requires a payment of 150% of the current SDC fees.

The City says the waiver approval is part of permit review and handled through its Revenue Division, and that applying early helps the process go more smoothly. The waiver does not cover everything. The City notes that if the sewer connection has to change, there can be more fees even when the SDC is waived, so keep a line in your budget for it.

For the zoning and permitting side of the project, our guide to Portland's ADU rules explains what is allowed on your lot.

How to choose the right ADU financing

1. Get a realistic number first. You can speak with one of our Design Consultants to set a budget range for your ADU before you shop for loans.
2. Check your equity and current rate. If you have a low-rate mortgage and plenty of equity, a HELOC or home equity loan often leaves that mortgage untouched.
3. Compare at least two or three lenders. Rates, fees and draw rules differ, and renovation loan rules differ even more.
4. Match the loan to the payment schedule. A staged build pairs well with a HELOC or construction loan, while a fixed-price project suits a lump-sum loan.
5. Plan for a cushion. Most overruns on a job come from changes you request, so budget a reserve for selections and changes.

Plan the financing and the build together

Lamont Bros. works with homeowners who want a design-build ADU in the Portland metro area and Southwest Washington, including Lake Oswego, West Linn, Oregon City and Beaverton. Homeowners choose Lamont because one cohesive team handles the design, the fixed-price construction contract and the build, and because Lamont offers financing and a three-year limited workmanship warranty. The best next step is to schedule a short call with a design consultant to talk through your property, your budget range and how financing fits.

Frequently asked questions

What is the best way to finance an ADU?

The best way to finance an ADU depends on your equity, your current mortgage rate and the project cost. A HELOC or home equity loan suits homeowners with substantial equity and a low-rate mortgage, a cash-out refinance can suit homeowners whose current rate is high, and a renovation loan can help when equity is limited.

Can you finance an ADU with a HELOC?

Yes, a HELOC can be used to pay for an ADU as long as you have enough equity and meet the lender's requirements. Because most HELOCs carry a variable rate, confirm how your payment could change over the life of the loan.

Will an ADU raise your property taxes?

Yes, an ADU is likely to raise your property taxes. Multnomah County assesses and taxes ADUs the same as any other new improvement, and it says the increase could be significant, so ask your county assessor for an estimate before you build.

Does Lamont Bros. build ADUs and offer financing?

Yes, Lamont Bros. builds ADUs in Portland and the surrounding area and offers financing for its projects. A design consultant can explain how financing applies to your ADU on the first call.

When should you talk to a lender about an ADU?

Talk to a lender early, while the design and the budget are still taking shape. Getting a ballpark cost from a design-build firm first lets you ask the lender about the right loan size instead of guessing.