5 Options for Financing An Accessory Dwelling Unit (ADU)
ADUs are becoming more popular in the United States as there are now more than 1.5 million ADUs, and roughly 110,000 are being built yearly. This increase in popularity makes sense because these modular homes are more affordable, energy-efficient, faster to build, and have many more benefits.
If you plan to build an ADU, you’ve made the right choice, and your next concern is financing the project. Do you use your credit card, take a loan, or are there special alternatives with more advantages?
Continue reading this article as we will provide five options for financing an Accessory Dwelling Unit (ADU), helping you make an informed decision.
Best Financing Options for ADUs
Below are five of the best ADU loans for homeowners or businesses interested in a modular home:
1. Home Equity Loans and HELOCs
Our first suggestion is Home Equity Loans and Home Equity Lines of Credit (HELOCs). Why? Because 56% of homeowners in California financed their ADUs with either a Home Equity Loan or HELOC.
The first choice basically involves leveraging your home’s equity to take a second mortgage, and this can be as a one-time loan or a line of credit. One reason to consider using a home equity loan is that you can relieve a lump sum of money that you can also pay back installmentally.
On the other hand, Home Equity Line works like credit cards and allows you to borrow money with a variable interest rate. This flexibility can be great for managing the development and assembly costs of your ADU project.
One reason to consider HELOCs is that they don’t replace your existing mortgage, which keeps the terms and interest rates of your original mortgage unchanged.
2. Cash Out Refinancing
Next is Cash out refinancing, which lets you turn your home equity into cash by obtaining a second mortgage larger than the first one. So, this new mortgage pays for your previous mortgage, leaving you with some leftover cash to finance your ADU - it’s basically killing two birds with one stone.
But how do cash out refinances differ from Home Equity Loans and HELOCs? The primary difference is that the new mortgage replaces your initial mortgage. But keep in mind that this option also comes with a different interest rate, which can be higher or lower than your first interest rate.
Nevertheless, this type of loan is great for homeowners with a lot of equity built up in their home, typically around $200,000. Additionally, most Cash-out refinances allow you to take up to 90% of your home equity in cash, giving you enough money to finance your new modular home.
3. Unsecured Loans or Personal Loans
Unsecured loans, also known as Personal Loans, are a type of cash advance that doesn’t require any collateral. Instead, the bank or financial institution gives you the money based on your creditworthiness.
While such ADU financing options sound like a dream come true, they come at a price; unsecured loans have high interest rates due to how risky they are. Also, the loan amount you can borrow is lower than that of more secured loans, usually a maximum of $100,000.
For example, unsecured loan lenders like LightStream offer between $5,000 to $100,000 to finance your ADU or tiny home but at a 4.99% interest rate. Because of the restrictions of Unsecured loans, many experts advise using them to finance simpler ADU projects like a garage conversion or a studio.
4. Construction Loans
Construction loans, also known as renovation loans, are perfect for sponsoring construction projects, including ADUS. This loan type basically lets you borrow money based on the future value of your home once the renovation or construction is complete.
For example, when using our ADU financing partner, Renofi, you can borrow up to 125% of your home value and 90% of the same property’s value after renovation. So, with the right provider, homeowners can get up to $200,000, which is enough to build an ADU.
The only drawback of this ADU financing option is that administration requirements can be complex, leading to longer closing times. Also, construction loans have a high rejection rate of 45%, unlike cash-out refinancing loans at 18.4%
5. DSCR Loans
If you plan to rent out your ADU after finishing construction, then a Debt Service Coverage Ratio (DSCR) loan may be best for you. DSCR analyses the property’s ability to cover the loan you’re about to take based on its potential earnings.
This opportunity lets the ADU pay for itself, and once the debt has been covered, you technically have a free property. But keep in mind that convincing the lender of your modular home’s earning potential is tricky.
You have to provide a detailed plan, including market research and financial projections showing the expected income and Return on Investment (ROI). So, while DSCR loans are excellent for financing your ADU, you should only opt for them when you’re building an investment, not a personal home.
Conclusion - Contact Mesocore Today!
There is no “best way” to finance an ADU, as this depends on your current financial situation and needs. Nevertheless, you can take a smart approach by contacting Mesocore, as we partner with Renofi to make building your dream modular home in Florida easier.
So, contact Mesocore today. Let us build the perfect ADU in Florida.
