An ADU can be built on your property to provide additional living space or income. An ADU can provide many benefits, one of the most prominent beings to enjoy extra income if you choose to rent out your ADU. ADUs are a good idea if you have unused land. It can also be expensive. ADUs typically cost between $150-and $300 a square foot. A modest, 750-square foot home in most areas will cost over $150k.
It is essential to consider whether your ADU is attached to the house or is a standalone, detached unit. Detached ADUs located away from the primary residence are usually more expensive than those connected. However, it should be said that financing is probably the first thing that should come to your mind when you are chewing over the prospect of constructing an ADU. For this reason, we will be discussing three of the variety of means you can use in ADU financing and what you may need to consider in different scenarios.
Home Equity Loans & HELOCs
A Home Equity Loan, one of the most commonly used ADU financing methods, is also available. Home equity loans are a great way to get financing for your ADU. A Home Equity Loan is a wise decision if your ADU will be rented out.
There are two options for Home Equity financing. One is the classic Home Equity Loan offers a fixed amount of cash with a fixed repayment schedule. Another is the HELOC, Home Equity Line of Credit, structured as a revolving credit line and has shorter repayment terms. Both are great options for financing ADUs, but you might find that one is more suitable after taking some time to do thorough research and considering for what purpose the ADU would be intended. Before choosing which financing method to use, you should evaluate your project timeline. Also, consider the impact on your cash flow.
Cash-Out Refinance
Another excellent option for an ADU construction loan is the cash-out refi. A cash-out mortgage replaces the original mortgage with another mortgage. The cash-out takes some equity out of the home and converts it into cash to pay for construction.
Refinancing your mortgage for the exact amount you have is similar to a traditional loan refinance. You would instead refinance for an amount higher than that amount. This will help you pay off your existing loans and make additional money for renovations, ADUs, or garage conversion.
Like all other ADU financing types discussed above, a cash-out refi requires that you have equity in your home. The maximum amount to refinance your home will be approximately 80% of its value.
Borrowing from Relatives or Friends
A loan is a way to tap into your loved ones’ generosity and credit if you have the money or good credit. This is a good option because you can agree on the repayment terms, and you’ll be dealing directly with someone who cares about your well-being. On the flip side, the lender may have power over you, even if your terms are followed by the letter. And if you default, well, we won’t go there.
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