Of course, you can finance an ADU to get the funds to build it. But, once built and you’re paying off that loan, can you refinance? It depends on the kind of financing you chose in the first place. The structure of your loan will determine if you can refinance an ADU just like your mortgage, or along with the rest of your mortgage. Here is what you need to know about the possibilities of refinancing an ADU.
If you chose to finance your ADU originally with a cash-out refinancing, you pulled from the equity of your home in order to build the ADU. You actually need to refinance after this to get a mortgage on both properties that have a rate and term, which then releases the money for the build.
Usually, you can then refinance again down the line the same way you’d refinance any mortgage. In this case, though, you would refinance both your home and the ADU, as they would now be in the same mortgage. You will need to qualify for a refinance as well, and your lender can explain the terms you need to meet.
Those who chose to get a second mortgage on their ADU could have kept that mortgage separate from their first. Instead of bundling them together, you can instead keep paying your old mortgage and simply pay a second (smaller) mortgage for the ADU. In this case, you can refinance just the ADU mortgage, just your home’s mortgage, or both. As always, you will need to meet the conditions needed to refinance, which are spelled out in the mortgages.
Home Equity Line of Credit (HELOC)
A HELOC loan is where you qualify for a substantial line of credit based on the equity that you have in your home. You can then pull-out funds while paying interest to build an ADU. Once the ADU is built, you are responsible for repaying what you borrowed. In fact, they typically have variable interest rates, which may go up if prime interest rates rise. You must pay this on top of your existing mortgage payment.
Unlike other lines of credit, a HELOC is readily financeable. However, you still have to qualify for the refinancing. Typically when you do this, you’ll just be getting a whole new mortgage where the amount you owe on the HELOC is rolled into the amount you owe on the home in total.
When you built your ADU you may have chosen a construction loan. These are dedicated, short-term financing that is meant to cover construction specifically. Once construction is complete, your loan may transition into either a mortgage, or it may need to be paid in full. If you run into problems and cannot pay the construction loan when it is due, you may not be able to refinance it but you may be able to add it to your mortgage or explore other options.
Consider Refinancing Beforehand
If you’re building an ADU and you think that you may need to refinance down the line, it is wise to know ahead of time what kind of financing options you will have.