How to Finance an ADU Using Home Equity

Many homeowners have a significant amount of untapped home equity, which is the difference between the current value of their home and what they owe on it.

Many homeowners have a significant amount of untapped home equity, which is the difference between the current value of their home and what they owe on it. Home equity can be a fantastic resource for building an accessory dwelling unit (ADU), which can be used as an additional source of income. 

Read on to learn how to use your home equity to fund a new ADU for your home.



Home equity is a valuable asset that many homeowners may not fully utilize. Let’s take a look at what home equity is and how it can be leveraged to finance the construction of an ADU. 

What Is Home Equity?

When you purchase a home and make mortgage payments, you gradually build property ownership. This ownership stake is referred to as home equity. For example, if you purchased a home worth $400,000 and your remaining mortgage balance is $300,000, you would have $100,000 in home equity. As your home's value grows, your equity grows with it.

What Is an Accessory Dwelling Unit?

An accessory dwelling unit, or ADU, is a standalone or attached secondary living space located on the same lot as a single-family home. Additional dwelling units have various configurations including backyard cottages, converted garages, basement apartments, and additions. ADUs are growing in popularity for several reasons because they: 


  • Provide multi-generational living

  • Allow adult children to live independently but close to family

  • Generate rental income

  • Create a dedicated home office or guest suite

Additionally, recent changes in zoning laws and regulations in many areas have made ADUs easier to build, contributing to their rising popularity.

Typical Accessory Dwelling Unit Cost and ROI

Building an ADU can be a substantial investment, so considering the potential return on investment (ROI) is important. Construction costs depend on various factors including your location, the project's complexity, the chosen materials, and local labor costs. It's best to obtain personalized estimates from reputable builders in your area for the most accurate picture.

ADUs can add significant value to your home, potentially exceeding your initial investment. Additionally, renting out an ADU can offer a reliable source of income. Consult with a real estate professional who can help you evaluate potential income based on rental rates in your region. 

How Does Home Equity Open Up Financial Possibilities?

Since home equity represents a portion of your home's value, you can leverage it as collateral for various uses. Utilizing a HELOC to finance the construction of an ADU can be a strategic and cost-effective way for homeowners to expand their living space or generate rental income.


A home equity line of credit (HELOC) can be a smart way to fund your ADU construction. This financial tool lets you turn the equity you've built in your home into a flexible line of credit. 

Your loan amount depends on your available equity, income, and credit history. You can access funds as needed instead of receiving a lump sum upfront. This can be especially helpful as construction costs may fluctuate throughout your project.

HELOCs operate in two phases. The first is the "draw period." During this period, you can withdraw funds and pay interest only.  Once the draw period concludes, you enter the "repayment period," when you'll start paying back the principal borrowed and any remaining interest.  


HELOCs are a popular choice for accessory dwelling unit financing for many reasons. First, they often offer competitive interest rates compared to unsecured personal or construction loans. 

Lower interest rates can translate to significant savings over the life of your loan. Additionally, because your home equity secures HELOCs, lenders view them as less risky.

Another enticing aspect of HELOCs is their flexibility and potential for tax benefits. You can withdraw funds only as needed during your ADU construction, minimizing interest charges. 

Furthermore, the interest paid on your HELOC may be tax-deductible (consult a tax advisor to confirm your eligibility). Check out our home equity loan calculator to estimate your potential savings with a HELOC.


Unlocking the potential of your home equity with a Foothill Credit Union HELOC is a straightforward process designed with your convenience in mind. Here's how to get started:

Step 1: Explore and Learn: Start by visiting our Home Equity Loans & Lines page. Here you'll find valuable details on our HELOCs, ADU loan offerings, and an explanation of how the process works. Check out our rates page to see how they compare to the L.A. metro average (Hint: Prepare to be pleasantly surprised!).

Step 2: Get Personalized Guidance: Contact our knowledgeable lending team to discuss your situation and goals. Ask questions, get pre-qualified (if desired), and receive the assistance you need to make informed decisions.

Step 3: Apply Your Way: Choose your best application method. You can apply securely online or visit one of our conveniently located branches for in-person support. 

Step 4: Gather Documentation: Be prepared to provide us with income verification, a recent property appraisal, and any other information needed to assess your eligibility.

Step 5: Review and Close: Our experienced team will carefully review your application and update you on the process. Upon approval, we'll facilitate a smooth closing for your HELOC.

At Foothill Credit Union, we combine streamlined processes with personalized support to make your HELOC journey effortless. Contact us with any questions and let us help you turn your home's equity into a new additional dwelling unit.


With its competitive interest rates, tax advantages, and flexibility, a HELOC can help you leverage your home equity to build an ADU that will expand your living space or boost your income.

Take the next step by applying for a HELOC with Foothill Credit Union. Click below to get started!

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