Are you looking to build an accessory dwelling unit? Are you wondering about ADU financing?
Believe it or not, building an accessory dwelling unit is about so much more than creating a cool extra space. It can add value to your property and a new dimension to your living space.
Here’s what you need to know about financing an ADU.
The Value of an ADU
Accessory dwelling units are independent dwelling units that exist on the same lots as detached, single-family homes. ADUs can be used for a number of purposes. These include separate apartments for in-laws or grown children, art studios, or home apartments.
ADUs can also increase your property value by 25% to 50%. Many families are seeing extended families moving in with each other in order to save money and be close to those they trust.
Dwelling units on your property allow your in-laws or older children to remain independent while being close enough to others in case they need them. You won’t need to share personal spaces such as kitchens or bathrooms. Yet you can stay close together in case of an emergency.
In today’s world, more and more folks are working remotely. An ADU promises the possibility of a separate, quiet space to work while remaining close to spouses and children. It’s also a space that you could potentially rent out for extra income.
There’s no question that accessory dwelling units are worthwhile investments. If you don’t have the cash on hand to start building, you don’t have to give up on your dream. There are a number of ways you can get the financing you need.
Home Equity Loan
If you own your property and have enough value in it, a bank may let you borrow against it up to an agreed-upon amount.
A home equity loan will give you a lump sum all at once. You will then pay it off each month with interest over a set number of years.
Home equity loans offer fixed rates and predictable payments, which can make budgeting easier. The interest on it may also be tax-deductible.
Home Equity Line of Credit
Like a Home Equity Loan, a Home Equity Line of Credit (HELOC) is secured by your home. In order to qualify for one, your lender will look at your credit history, employment, and monthly income.
Unlike a Home Equity Loan of Credit, however, a HELOC provides more flexibility. You can borrow what you need, pay off the loan, and then borrow again.
HELOCs also have adjustable rates that could make your payments less predictable. Talk to your bank about how a HELOC or Home Equity Loan would work in your situation.
Cash-Out Refinancing
While other options allow you to borrow smaller amounts of money as needed, refinancing provides you with a lump sum payment that will get added to your monthly payment.
Cash-out refinancing is a good idea if mortgage interest rates have dropped since you took out your initial mortgage. They will mitigate some of your costs. You may also be eligible for some tax deductions.
Construction Loans
Another option for financing your ADU is a construction loan. With these, banks will assess the value of your property as well as your construction plans. They will then calculate how much they think your home will be worth after the accessory dwelling unit is built.
The bank can then provide you with a percentage of the estimated increase that you can use to build your unit. It will get dispersed over time as an inspector keeps track of your progress.
In order to qualify for a construction loan, your finances, plan, and builder will all need to be evaluated. Construction loans afford you a lower interest rate and a longer repayment period.
PACE Loan
Property Assessed Clean Energy or PACE loans offer to finance when your work is environmentally friendly. They don’t require a downpayment.
With these loans, however, you’ll need to budget carefully, as you’ll only be paying them off twice a year. Terms are flexible and the loan may be tax-deductible. However, the interest rates may be higher than they are with other loan types.
Building Your Accessory Dwelling Unit
Companies that build quality accessory dwelling units for a living, such as https://actonadu.com/, can provide you with more information on building a quality unit in your neighborhood.
You should begin by calling your local municipal planning or building department to see if zoning laws allow you to build an ADU on your property. You’ll also want to find out if there are laws against you using it as a rental unit if that’s your plan.
Once you’re sure that you’ll be permitted to build, you can call up a builder for a ballpark estimate. It’s then time to check out your financing options and make sure you can secure a loan.
Before you can begin construction, you’ll need to take a trip to your town hall for a permit. Waiting could take between two to four months.
Finally, you can begin building. Your unit could take anywhere from two weeks to two months, depending on complicated the design is.
Get Building
With so much changing in the world, an accessory dwelling unit can provide a secure living situation for your entire family. It will also increase your home’s value. Once you’ve secured the right financing for your situation, you can get to work on the ADU of your dreams.
Don’t stop getting smart about your home and finances now. For more great advice, read our blog today.
