How to Pay for an ADU Without Draining Your Savings: A Financing Playbook
Let's be honest: building an ADU is not cheap. In New York City, you're typically looking at $150,000 or more. For most homeowners, that's not an amount you can just pull from your checking account.
The good news? There are several smart ways to finance an ADU — and you don't have to figure it out alone.
Option 1: Home Equity Line of Credit (HELOC)
If you've owned your home for a while and built up some equity, a HELOC is often the most straightforward path. You're borrowing against the equity you've already built in your home, and interest rates on HELOCs tend to be similar to standard mortgages. HELOC lenders typically offer interest-only payments for the first 10 years, which means lower monthly payments.
The catch: your home needs to have enough equity, and the lender will want to see that you have sufficient income to make the payments.
Option 2: Home Equity Loan (HeLOAN)
Similar idea, different structure. You borrow against the equity in your home without refinancing your mortgage, but instead of a line of credit, you receive a lump sum at the closing.
Option 3: Cash-Out Refinance
This involves refinancing your mortgage for a larger amount than you currently owe, and pocketing the difference to fund your ADU. This can work well if current interest rates dropped since your last mortgage, but it does mean a higher monthly mortgage payment and larger closing costs.
Option 4: Renovation or Construction Loan
Some lenders offer loans specifically designed for major capital improvement projects like ADUs. These are structured around the construction process — funds are released in stages as the project progresses. Ask your bank or a mortgage broker if they have construction or ADU-specific products.
Option 5: State and City Grant Programs
New York State's Plus One ADU Program offers grants of up to $395,000 for NYC homeowners who qualify (see our other post on this for details). It's income-restricted, but if you qualify, it's the best deal out there. Unfortunately, the State only allocated enough funds for 15 NYC homeowners, so you’ll have to wait until the next round of funding in order to apply.
Option 6: ADU-Specific Lenders
A growing number of specialty lenders now offer loans designed around ADU projects. They understand the timeline, the permitting process, and the expected returns — which means they may be more flexible than a traditional bank.
How to Choose the Right Option for You
The best financing path depends on your specific situation: how much equity you have, your income, your credit, and how much you need to borrow. Here's a quick way to think about it:
Lots of equity, low debt? → HELOC, HeLOAN or cash-out refi
Lower income or less equity? → Look into grants and ADU-specific lenders
Want to keep your current mortgage untouched? → Renovation or construction loan
Second Key Can Help You Navigate This
We have relationships with lending partners who understand ADU financing inside and out. When you start your project with us, we'll help you figure out the financing piece by connecting you with lenders — so you can focus on the fun stuff, like designing your ADU.