Building an accessory dwelling unit is rarely a cash purchase — most homeowners borrow against equity they already have, refinance their existing mortgage, or take out a loan built specifically for construction. Which option makes sense depends on your current mortgage rate, how much equity you've built up, and how fast you need the money in hand. Here's how the main paths compare, and where things stand with state grant money in 2026.
What Are My Main Options for Financing an ADU?
Most homeowners choose from three paths: a home equity line of credit (HELOC), a cash-out refinance, or a construction loan. A smaller group uses personal loans, 401(k) loans, or unsecured "ADU loans" from specialty lenders, but those tend to carry higher rates or lower limits, so they're usually a backup rather than a first choice.
Each of the three main options draws on a different resource: a HELOC borrows against the equity in your home without touching your existing mortgage; a cash-out refinance replaces your whole mortgage with a bigger one and hands you the difference in cash; a construction loan lends against the home's value after the ADU is built, then often converts into a standard mortgage.
How Does a HELOC Work for an ADU?
A HELOC is a revolving line of credit secured by your home, similar in structure to a credit card — you draw what you need during a set "draw period," pay interest only on what you've borrowed, and your available credit refills as you pay it down (FTC Consumer Advice). That structure suits ADU construction well, since you typically pay contractors in stages rather than all at once.
The tradeoff is rate risk: HELOC rates are variable, tied to the prime rate, so your payment can rise if rates move against you. As of September 2026, the national average HELOC rate is around 7.26% (Bankrate). Because your existing mortgage stays untouched, a HELOC is usually the better fit if you locked in a low rate years ago and don't want to disturb it.
What About a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new, larger one and gives you the difference in cash at closing. It's a fixed-rate loan with a predictable payment for the life of the term, which some homeowners prefer over a variable-rate HELOC. As of September 2026, average 30-year refinance rates run around 7.0% (Bankrate).
The catch is that a cash-out refinance resets your entire mortgage — not just the amount you're borrowing for the ADU. If your existing rate is well below today's average, rolling your whole balance into a new loan at a higher rate can cost more over time than borrowing the ADU amount separately through a HELOC. Run the math on your full balance, not just the new draw, before deciding.
Is a Construction Loan Worth the Extra Complexity?
A construction loan is underwritten against the home's projected value once the ADU is finished, not its current value — which can unlock more borrowing power if you don't have much equity yet. Funds are released in stages tied to inspections, and many construction loans convert automatically into a standard mortgage once the build is complete.
The tradeoff is paperwork and time: lenders want detailed plans, a firm budget, and a licensed contractor before they'll approve draws, and closing typically takes longer than a HELOC or refinance. It's worth the extra steps mainly for homeowners who don't have enough existing equity to qualify for the other two options.
Are There Grants or Other Programs That Can Help?
If you're in California, you may have heard about a $40,000 ADU grant covering pre-development costs like permits, architectural plans, and soil tests. That program, run through CalHFA, stopped accepting new applications once its funding round was fully allocated in December 2023, and as of 2026 it has not reopened with new money (CalHFA). Be wary of anyone — a contractor or "consultant" — who tells you they can still get you this grant; CalHFA itself warns that claims like that are often scams.
Beyond that program, check with your city or county: some municipalities and utilities run smaller ADU-specific incentives, waived permit fees, or energy-efficiency rebates that can trim your project cost even without a large state grant.
How Do the Main Options Compare?
| Option | Typical Rate (Sept. 2026) | Speed to Close | Best For |
|---|---|---|---|
| HELOC | ~7.26% (variable) | 2–4 weeks | Homeowners with a low existing mortgage rate and enough equity |
| Cash-out refinance | ~7.0% (fixed) | 4–6 weeks | Homeowners whose current rate is near or above today's average |
| Construction loan | Varies by lender; often fixed, then converts | 6–10+ weeks | Homeowners without enough current equity to qualify otherwise |
Rates are national averages and change frequently — your quoted rate will depend on your credit, equity, and lender.
What to Do About It
Before you pick a financing path, get a real construction estimate — financing decisions are hard to make against a guess. Costs vary widely by unit size, finish level, and site conditions, as covered in How Much Does an ADU Cost to Build in 2026?, and permitting requirements factor into your timeline and budget too, which Do I Need a Permit for an ADU? walks through.
Once you have a realistic budget, get quotes from more than one lender for whichever financing path fits your situation, and get more than one bid from licensed contractors for the build itself. A single quote only tells you what one lender or one contractor wants to charge — comparing several is what tells you whether that number is actually fair, rather than just hoping it is.
If you're weighing whether the investment pays off long-term, it's also worth reading Does an ADU Really Increase Your Property Value? before you commit to a financing structure that assumes a particular payback timeline.