An ADU is a large project, and most owners do not pay for it from savings alone. This guide lists the main ways people finance one, and what to ask before you borrow.
LA ADU Guide is an information site. We are not a lender and do not offer or arrange loans. Terms below are general. Rates and rules change, so confirm with lenders.
The main options
1. Cash or savings
No interest and no lender rules. The cost is the lost flexibility. Keep a reserve for change orders.
2. Home equity loan or HELOC
You borrow against the value of your home.
- A home equity loan gives a lump sum, usually at a fixed rate.
- A HELOC is a line of credit you draw as needed, usually at a variable rate.
Both put a lien on your home. Lenders look at your equity, income and credit. Equity is measured on the current value, so a loan may be limited if you owe a lot already. Compare the margin, any fees, and when a variable rate can change.
3. Cash-out refinance
You replace your mortgage with a larger one and take the difference. This can make sense when your current rate is high. It is often a poor fit if your current rate is low, because the new rate applies to the whole balance.
4. Renovation loans
Some mortgage programs lend based on the value of the home after the work is done. Fannie Mae's HomeStyle renovation loan and the FHA 203(k) program are two examples that lenders describe for ADUs. We did not confirm ADU terms from the program owners, so ask lenders whether a specific loan covers a detached unit and whether it counts future rent.
5. Construction loans
A construction loan pays out in stages as work is finished. Lenders usually require a licensed contractor, a budget, plans and permits, and a draw schedule. These may convert to a permanent loan when work ends.
6. Local or nonprofit programs
Some cities, counties and nonprofits run small programs. Check your own city and county housing departments. Availability changes.
Options compared
| Option | How it works | Watch for |
|---|---|---|
| Cash or savings | No interest, no lender rules | Keep a reserve for change orders |
| Home equity loan | Lump sum, usually fixed rate | Lien on your home; limited by equity |
| HELOC | Line of credit, usually variable rate | Margin, fees and when the rate can change |
| Cash-out refinance | New larger mortgage replaces the old one | New rate applies to the whole balance |
| Renovation loan | Based on value after the work | Ask if a detached unit and future rent count |
| Construction loan | Paid out in stages | Licensed contractor, plans, permits and a draw schedule |
| Local or nonprofit program | Small programs from cities, counties or nonprofits | Availability changes |
What happened to the CalHFA ADU grant
This is the most confusing topic online, so here is what the state's own report says.
- CalHFA launched its ADU Grant Program in September 2021. It started at $25,000 for pre-development costs and was raised to $40,000 in March 2022.
- Eligible costs included design, permits, impact fees, soil tests, surveys, energy reports, utility hookups and certain construction financing closing costs.
- Phase 1 had $100 million. A January 2025 report says the 2023-24 State Budget added $25 million for Phase 2, with income eligibility cut to lower-income homeowners.
- CalHFA is not a direct lender. Grants went through partner lenders, credit unions, nonprofits and local agencies, and funds went into a construction escrow.
Many contractor and lender pages still advertise the grant. We could not confirm that funds are available now. Check calhfa.ca.gov before planning around it.
Questions to ask any lender
- Is the loan allowed for a detached ADU, an attached ADU or a conversion?
- Is it based on current value or after-completion value?
- What are the rate, fees and any prepayment penalty?
- Is the rate fixed or variable?
- Are rental income projections counted? (See rental income and property tax.)
- What contractor and permit documents are required?
- How are construction payments released?
How to choose
Start with your numbers, not the product.
- Low rate on your current mortgage. Replacing it with a cash-out refinance can cost more than a separate home equity loan.
- Plenty of equity and steady income. A HELOC or home equity loan is simple, and fees are often lower than a refinance.
- Little equity today. An after-completion-value renovation or construction loan may allow more borrowing, but expect more paperwork and a stricter lender review of your contractor and plans.
- Uncertain final cost. A line of credit gives flexibility, but a variable rate adds risk. A fixed loan gives certainty, but you pay interest on the full amount from day one.
Write down the monthly payment under each option. Then test it against a month with no rent coming in from the new unit.
Protect yourself
- Get at least three offers and compare the full cost, not only the rate.
- Be careful with contractor-arranged financing. Read the contract and the loan separately.
- Check the contractor license on the state board site. See hiring an ADU builder.
- Do not pay large amounts before work starts. California limits home improvement down payments. Check the current limit with CSLB.
- Make sure the loan amount covers permits, fees and a cushion. See ADU cost in Los Angeles and impact fees.
Quick checklist
- [ ] Total project budget, with soft costs and fees
- [ ] Current home value and mortgage balance
- [ ] Offers from three lenders
- [ ] Fixed or variable rate
- [ ] Draw schedule for construction loans
- [ ] Plan for the monthly payment if the unit sits empty for a while
What to remember
- There is no single best loan. The right one depends on your current mortgage rate and equity.
- The CalHFA grant was real, but its status needs a fresh check.
- Borrowing against your home puts your home at risk if you cannot repay.
See the ADU financing hub for related guides.