HELOCs for Accessory Dwelling Units (ADUs): A Closer Look at Costs and Financing with Equity

Whether you’re designing an accessory dwelling unit (ADU) because your family needs more living space, you’re planning to care for a loved one, or you want to make passive income from a rental property, there’s no getting around it: Building an ADU is expensive. And while an ADU can drive up your home’s value and be a source of income, you still need money upfront to construct it.

A home equity line of credit (HELOC) is a great option for homeowners with significant equity in their homes who want to finance their ADU construction. We’ll cover the costs of different types of ADUs—and when and how HELOCs can assist. In the table below, check out our ratings for the best HELOCs to help fund an ADU.

What are the costs of building an ADU?

Building an accessory dwelling unit can cost anywhere from $40,000 to $360,000, according to the most recent data from Angi (formerly Angie’s List). The wide variation accounts for the different types of ADUs you can have, from “simple” basement, attic, or garage conversions to construction of a new attached or detached dwelling.

Here’s how those costs generally break down:

• Materials: 45% to 50% of the total project cost
• Labor: 40% of the total project cost
• Designs and permits: 10% to 15% of the total project cost

Converting an existing part of your home—like a basement, attic, or garage—into an ADU is the most affordable project. You’ll still have to hire multiple contractors to handle plumbing, electrical, insulation, flooring, drywalling, and painting, but you’re not starting from nothing.

Constructing a new living space—either as an addition (such as above an existing garage) or as a standalone property (like a small guest house)—is more expensive. You’ll need to budget for site preparation, foundation work, structural engineers, and a full construction crew with a general contractor who oversees the project. 

The table below shows the general cost ranges for various ADU projects:

Project size	Example ADU	Cost range
Small	Basement, attic, or garage with living space	$60,000 – $150,000
Medium	Attached addition	$128,000 – $225,000
Large	Freestanding addition	$110,000 – $285,000

The costs of building an ADU can vary depending on:

• The size of the space: A small conversion may cost less than $60,000, while converting or constructing a large space (1,000 square feet or more) may take project costs above $300,000.
• Local labor and material rates: Areas with a higher cost of living, such as major metro and coastal areas, typically have higher labor and material costs.
• The quality of materials and finishes: Choosing higher-quality appliances, fixtures, doors, windows, flooring, countertops, cabinets, and other elements can drive up the price of your ADU.

How a HELOC can help finance your ADU

Home equity lines of credit are a great choice for financing an ADU. Their flexibility during draw periods and a delayed repayment period (sometimes as far as 10 years out) are just some of the benefits of HELOCs for ADUs.

For instance, constructing an ADU could be a multi-month or even multi-year project. Rather than take out all the money you’ll need to finance the project at once, as you would with a home equity loan, a HELOC allows you to draw only the amount you need at each stage of the construction process.

And if you’re hoping to use the ADU as a rental property, a HELOC buys you some time to recoup some of the investment. That’s because HELOC draw periods can last five to 10 years. If construction only takes a year, you potentially have four to nine years before you start repaying the HELOC’s principal balance.

Note: You will likely have to make interest payments during the draw period.

Making interest-only payments does not decrease your principal balance. This is very important to be aware of if you’re trying to take advantage of the draw period.

Kyle Ryan, CFP®

Example: Using the draw period to your advantage

Assume you’re approved for a $200,000 HELOC, but the total cost of ADU construction is not quite clear at the onset; the best you have is a quote and payment schedule.

Assume there are four stages in your contractor’s payment schedule, and you receive an invoice at each one:

• Stage 1: $75,000
• Stage 2: $25,000
• Stage 3: $50,000
• Stage 4: $20,000

In total, the project costs $170,000. Because you have a HELOC and can make draws at each stage for the exact amount you need, you only borrow $170,000.

If you had chosen another route, such as a home equity loan or a personal loan, you would have had to take out the $200,000 at the beginning in a single lump sum, and thus you would have borrowed more than you needed.

What is the ROI of an ADU?

For some, accessory dwelling units aren’t about ROI. They’re about adding a bedroom as your family grows or creating a space for an aging parent or loved one who needs extra care (ADUs are also known as mother-in-law suites, granny flats, multigenerational houses, and accessory apartments). In short, sometimes the money doesn’t matter; it’s just what your family needs.

But for those hoping to recoup their investment by renting the ADU to a tenant (or as a vacation rental), how can you calculate the ROI? Much of that depends on how much you spend, market demand, ongoing maintenance costs, zoning restrictions, and more.

Let’s look at a basic rental scenario that shows just how long it might take to recoup an investment. Imagine the following scenario:

• ADU cost: $120,000
• Monthly rental income: $1,500

That means you’re making $18,000 a year in rental income, and assuming no additional costs or vacancies, it will take roughly 6.7 years to recoup your investment.

Year	Total rental income revenue
1	$18,000
2	$36,000
3	$54,000
4	$72,000
5	$90,000
6	$108,000
7	$126,000

However, rental income isn’t so black and white. When you finance an ADU with a HELOC and then rent it out, you will most certainly have additional costs over time, such as:

• Interest on your HELOC until it’s repaid
• Ongoing maintenance costs as a landlord
• Advertising costs when in between tenants
• Heightened property taxes after your home is reappraised
• Potential property management fees

These and other costs eat into your annual rental earnings and thus extend the time it takes to recoup your investment. Even so, give it 10 or so years, and you’ll likely make back what you spent—and then you can start thinking about profits in future years. Remember that equity and home price appreciation will also factor in here.

When you sell your house, you likely won’t make back what you spent on an ADU. However, the increased square footage and potentially additional bedrooms or bathrooms can drive up your asking price to a degree and may help you sell the house faster.

That said, think about prospective buyers in your area. Young single families may be less likely to add or want an ADU compared to an older family.

When does financing an ADU make sense?

Financing an ADU can make sense in several scenarios, such as:

• Low mortgage rate: If you purchased your home during record-low mortgage rates, you may be hesitant to move now that rates are higher. But what if your family has grown and needs more space? Financing an ADU may make more financial sense than moving and losing your low rate.
• Strong market demand: If you live in an area with a high market demand for rentals, and few properties available, you make a lot of money by converting a part of your home into an ADU or constructing a new ADU space on your lot. The potential high earnings can offset the costs of financing with a HELOC.
• You’re sticking around for a while: Financing an ADU can make sense if you have long-term plans to stay at your current property. This gives you more time to recoup the investment and repay the loan with rental income.
• A loved one needs to move in: If buying a larger home isn’t an option and a friend or family member needs to move in so you can be their caretaker, an ADU is your best bet to give them the space and privacy they need.

It doesn’t always make sense to finance an ADU with a HELOC, however, including when:

• Your location has a lot of zoning restrictions: Some municipalities have strict guidelines about ADUs, which may limit your options. Increasingly, cities are also making it harder to rent spaces on sites such as Airbnb.
• You don’t have enough equity in your home: If you haven’t built up enough equity in your home (15% to 20%), you probably can’t qualify for a home equity line of credit.
• You’re in debt: Taking on more debt when facing other high-interest debt, such as credit cards, personal loans, or student loans, is not a wise choice. If you qualify for a HELOC, your high debt-to-income ratio will likely earn you a high interest rate, making it more expensive in the long run.
• Your cash flow isn’t strong enough: If your cash flow is insufficient, you may not qualify for a HELOC, and even if approved, you might struggle to keep up with the payments.
• Your credit score is low: A low credit score can prevent you from qualifying for a HELOC or result in a higher interest rate, making borrowing more expensive.

When deciding to pursue a project like this, one of the most important factors to initially consider is the current interest rate environment. HELOCs offer variable interest rates, so what does the future outlook look like?

From there, you can determine if liquidating investments or using excess cash for a portion, or the entirety of the project makes sense. If not, and financing is the only option, review different financing options to determine the best route for your cash flow and financial plan moving forward.

Kyle Ryan, CFP®

Are garages with living spaces an ADU option?

Garages with living spaces are a popular option for an accessory dwelling unit. The existing structure expedites the timeline and saves on construction costs. A single-car garage may offer enough space for a bedroom, while a two-car garage could accommodate a larger bedroom with a full bathroom.

Alternatively, the space above your garage is a popular candidate for building an addition that expands the second story of your home. This will likely be more expensive than converting a garage, but you don’t have to sacrifice parking and storage in your garage if you go this route.

Lenders that offer HELOCs for ADUs

If you’re considering a HELOC to finance your ADU project, choosing a lender that aligns with your specific construction needs and timeline is essential. Here’s a comparison of three top HELOC providers, each offering unique features suited for ADU financing.

Figure

Best for Fast Funding

4.9 _/5

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Why it’s good for ADUs

Figure’s HELOC is perfect for homeowners ready to immediately start an ADU project and use the full loan amount. Its shorter five-year draw period and the requirement to draw 100% of the credit line up front make it ideal for funding a single, focused ADU build, such as a detached unit or garage conversion. 

Unlike Bethpage and Spring EQ, Figure’s fixed-rate HELOC does not allow for interest-only payments during the draw period, requiring full principal and interest payments from the start. This can lead to faster repayment but may be less flexible for those managing cash flow. The trade-off for fixed rates is a predictable repayment schedule. Figure’s streamlined application process ensures fast funding.

Rates (APR)	6.95% – 16.01%
Draw period	5 years
HELOC amounts	$20,000 – $400,000

Bethpage FCU

Best Credit Union

4.7 _/5

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Why it’s good for ADUs

Bethpage’s HELOC offers flexibility and cost-saving features that make it ideal for ADU projects. You can access up to $1 million without requiring a 100% initial draw, allowing for phased spending on ADU construction. 

Its fixed-rate options provide stability, and a 10-year draw period ensures funds are available for extended renovations. The 12-month introductory rate is competitive. This flexibility is well-suited for homeowners adding or converting spaces (such as garages) into ADUs.

Rates (APR)	12-month intro rate of 6.99% for VantageScores of 720 and up; then a variable rate
Draw period	10 years
HELOC amounts	$10,000 – $1 million

Spring EQ

Best for a Long Draw Period

4.1 _/5

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Why it’s good for ADUs

Spring EQ is an excellent choice for homeowners undertaking gradual ADU projects or planning multiple units over time. With access to up to 95% of your home equity and draw periods of up to 20 years, this HELOC accommodates extended timelines and evolving renovation needs. 

Tap into $500,000 in home equity, which can make it a fit for larger or phased ADU builds. Competitive rates and the flexibility to select a draw period of up to 20 years can align the HELOC with your preferred project strategy.

Rates (APR)	Starting at 9.50%
Draw period	3, 10, or 20 years
HELOC amounts	$25,000 – $500,000

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Best HELOC Lenders & Rates

How we rated the best HELOCs for ADUs

Since 2018, LendEDU has evaluated home equity companies to help readers find the best home equity loans and HELOCs. Our latest analysis reviewed 850 data points from 34 lenders and financial institutions, with 25 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.

Recap of the best HELOCs for ADUs