You don't have to pay cash upfront. Most homeowners use equity they already have in their home to fund their ADU build. Here's how it works.
If you own your home and have built up equity over the years, you likely have more financing options than you realize. Here are the four most popular paths Utah homeowners use to fund their ADU projects.
Most ADU financing is based on home equity. Here's a simple breakdown of how lenders calculate how much you can borrow.
Home equity is the portion of your home's value that you actually own. It's the difference between what your home is currently worth and what you still owe on your mortgage. The more equity you have, the more you can typically borrow for a project like an ADU.
Most lenders will let you borrow up to 80 to 85 percent of your home's appraised value, minus what you owe on your current mortgage. This is called your Combined Loan-to-Value (CLTV) ratio.
In this example, the homeowner could potentially access up to $210,000 to fund their ADU build. Actual amounts depend on credit score, income, and lender requirements.
Every financing option has tradeoffs. Here is a quick breakdown to help you decide which direction to explore first.
| Option | Rate Type | Best For | Complexity |
|---|---|---|---|
| HELOC Most Flexible | Variable | Phased builds, flexibility | Low to Medium |
| Home Equity Loan | Fixed | Predictable budgets | Low |
| Cash-Out Refinance | Fixed | High equity, favorable rates | Medium |
| Construction Loan | Variable then Fixed | New builds without equity | High |
A little preparation before you walk into a bank can save you thousands. Here are the most important things to get right.
Most equity-based loans require a credit score of 620 or above. Scores above 720 get the best rates. Pull your free report at annualcreditreport.com before applying.
Lenders want to know what you're borrowing for. Having a detailed written estimate from a licensed contractor makes your application stronger and avoids over-borrowing.
HELOC and home equity loan rates vary significantly between banks and credit unions. Getting 3 or more quotes can save you a full percentage point or more on your rate.
Your loan amount should cover construction, permits, utility connections, landscaping, and a 10 to 15 percent contingency buffer. Surprises happen in construction.
A $150,000 ADU financed at 7% over 20 years costs about $1,160 per month. If you rent for $1,500 to $2,000 per month, the unit pays for itself and generates positive cash flow.
Utah credit unions often have better HELOC and home equity loan rates than big banks. America First, Mountain America, and Utah Power Credit Union are worth checking.