Most homeowners don't pay cash for an ADU — they finance it, usually using equity they've already built up in their home. Two options come up most often: a HELOC and a construction loan. Here's the short version of how each works.
A HELOC works like a credit card backed by your home's equity. You're approved for a credit limit and draw funds as you need them during construction, paying interest only on what you actually use. Rates are typically variable (prime plus 0 to 2%), with a draw period of 5 to 10 years. Most lenders let you borrow up to 85% of your home's equity. It's the most popular option because of its flexibility, especially for phased projects.
A construction loan is purpose-built for projects like this — funds release in stages as construction milestones are hit, and some lenders now offer ADU-specific products with streamlined approval for projects under $250,000. Rates run slightly higher than a standard mortgage during the construction phase, and it typically converts to a permanent loan once the build is finished. This is often the right fit if you don't have much existing equity to draw against.
If you already have significant equity in your home and want flexibility to draw funds as you go, a HELOC is usually the simpler, cheaper option. If your equity is limited or you'd rather have funds tied directly to construction milestones, a construction loan is worth a closer look. There are also home equity loans (a fixed lump sum instead of a credit line) and cash-out refinances, which make sense in different situations.
For a full comparison — including a worked example of how lenders calculate what you can borrow, and what to do before you apply — see our complete ADU Financing Guide.