The two most common ways to borrow for an ADU are a construction loan and a home equity line of credit (HELOC). They work very differently. This guide explains how, so you can compare offers on equal terms.
LA ADU Guide is an information site. We are not a lender and do not offer or arrange loans. Terms vary by lender and change often. Confirm everything with the lender in writing.
The short version
A HELOC lends against the equity you have today. A construction loan lends against the project, often including the value the home will have after the ADU is finished. A HELOC is simpler. A construction loan can allow more borrowing but comes with more oversight.
Side by side
| Feature | HELOC | Home equity loan | Construction loan |
|---|---|---|---|
| How you get money | Draw as needed from a line | One lump sum | Released in stages as work is finished |
| Rate type | Usually variable | Usually fixed | Varies by lender |
| Based on | Current home value and equity | Current home value and equity | Often the value after completion, plus the budget |
| Paperwork | Lighter | Lighter | Plans, permits, budget, contractor details |
| Contractor review | Usually none | Usually none | Lenders usually require a licensed contractor |
| Inspections before payment | None | None | Common, tied to a draw schedule |
| Lien on your home | Yes | Yes | Yes |
This table describes the general pattern. It is not a promise about any lender. See ADU financing options for the full list of choices, including cash-out refinance and renovation loans.
How a HELOC works
You are approved for a credit limit based on your equity, income and credit. You borrow only what you use. Many HELOCs have a draw period when you may pay interest only, then a repayment period when payments rise. Ask about:
- The margin and what index the rate follows
- How often and how far the rate can change
- Annual fees, closing costs and early closure fees
- What happens to the payment when the draw period ends
A HELOC is easy to start, but a limit can be lowered or frozen by the lender under the terms of the agreement. Read that section before you rely on it to finish a build.
How a construction loan works
The lender approves a budget and a plan. Money is released in draws as work reaches set milestones. The lender may send an inspector before each draw. Some loans convert to a permanent mortgage when the work ends, and some require you to refinance.
Expect to provide:
- Plans and the building permit
- A signed contract with a licensed contractor
- A line-item budget
- A draw schedule
Match the draws to the contract
Your contract and your loan each have a payment schedule. They must fit together. Under Business and Professions Code section 7159, a home improvement down payment may not exceed $1,000 or 10 percent of the contract price, whichever is less. CSLB says progress payments "must reflect the actual work completed or materials delivered." If a lender's first draw is bigger than the law allows the contractor to collect, ask the lender and CSLB how that works before you sign. See hiring an ADU builder.
Which fits which situation
- Lots of equity, steady income, a clear budget. A HELOC or home equity loan is simple. A fixed loan gives a predictable payment.
- Little equity today. A construction loan based on after-completion value may allow more borrowing.
- A low rate on your current mortgage. Keep it if you can. A separate loan avoids repricing the whole balance.
- Unclear final cost. A line of credit gives flexibility, but a variable rate adds risk.
About the CalHFA grant
CalHFA's ADU grant was used for pre-development costs such as design, permits and fees, and a January 2025 report describes the program. We could not confirm that funds are available now. Check calhfa.ca.gov before planning around it.
Risks to weigh
- Both options are secured by your home. If you cannot repay, you can lose the home.
- A variable rate can raise your payment.
- Construction costs can rise, and a lender will not always raise your limit.
- Rent from the new unit is not guaranteed. Test your budget with no rent for several months. See rental income and property tax.
Questions to ask the lender
- Does this loan cover a detached ADU, an attached ADU or a garage conversion?
- Is the amount based on today's value or on after-completion value?
- Is the rate fixed or variable, and when can it change?
- What are all the fees, including appraisal and inspection fees?
- Is projected rent counted?
- How are draws requested, inspected and paid?
- Does the loan convert to a permanent mortgage, or must I refinance?
- Is there a prepayment penalty?
Checklist before you apply
- [ ] Full project budget, including design, permits, fees and a cushion (see ADU cost in Los Angeles)
- [ ] Current home value and mortgage balance
- [ ] Offers from at least three lenders
- [ ] A draft contract with a licensed contractor
- [ ] The monthly payment under each option
- [ ] A plan for a month with no rent
What to remember
- Neither option is better for everyone. Compare total cost and risk, not only the rate.
- A construction loan adds oversight. A HELOC adds flexibility.
- Line up loan draws with the contract payment schedule and the state limits.
See the ADU financing hub for related guides.