URBANEERING 101: FINANCING
Several forward-thinking states, big cities and communities are pioneering the way for the rest of the country, loosening zoning restrictions on ADUs in order to make more housing and alternative living options available than ever before.
Perhaps the most straightforward of your financing options is cash. If you have enough cash-on-hand, you can pay for an ADU in full. You can also combine cash with other financing options, to lower the long-term payments.
A renovation loan, which may be wrapped into a mortgage loan, can cover a significant portion of an ADU build or installation. It relies on the estimated value of the home after the renovation or ADU installation, which can add significant value to a property, especially if the ADU is to be used as a rental property.
If you have a large amount of equity in your home, the refinancing market is attractive (lower interest rates, etc.), and the appraised value is higher than what you owe, this could be a viable option for you. Generally speaking, in this scenario, you refinance your home at a lower rate and a newly appraised value. You then use the excess money to purchase your ADU, with that cost being wrapped into your refinanced mortgage.
This option is not right for everyone, so ask your lending professional to do a comparison between your other financing choices.
If you have equity in your home, you may be able to borrow against it with a home equity loan. Think of this like you would a typical loan: You borrow a fixed amount of money and pay it back on a schedule. This is a longer term loan compared to a home equity line of credit, but it taps into the investment you’ve already made in your home.
Like home equity loans for your ADU, a home equity line of credit relies on the investment you’ve already made in your home, but it’s structured differently. You can borrow smaller amounts with repayment terms that are shorter than an equity loan; interest rates are only charged against the smaller amounts, until repayment is complete.
If you have equity in your home, ask a home financing professional which is best for your situation.
If you don’t have enough equity in your home to cover the cost of an ADU, or you want to preserve your equity, a construction loan may be the best choice. Initial terms of a construction loan are usually less attractive than a traditional mortgage, with higher down payments and interest rates, but it is converted to a traditional loan after the project is completed.
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Contact URBANEER® for information, floorplan availability and zoning rules in your area.