Find the Right Financing Option for Your Accessory Dwelling Unit
When it comes to financing an ADU in Massachusetts, there’s no one-size-fits-all solution. Whether you’re tapping into your home equity, refinancing your mortgage, or applying for a renovation loan, understanding the pros and cons of each option will help you make the smartest decision for your property and budget.
Use this guide to compare the most common ADU loan types available from Massachusetts lenders, banks, and credit unions.
🏦 1. Home Equity Loan
What it is: A one-time lump sum loan secured by your home equity, with a fixed interest rate and fixed monthly payments.
Best for: Homeowners with significant equity who want a predictable repayment schedule.
| Feature | Details |
|---|---|
| Loan Amount | Typically up to 80% of home equity |
| Interest Rate | Fixed |
| Repayment Term | 5–30 years |
| Funds Use | Paid in full upfront |
| Risk Level | Moderate – home is used as collateral |
Pros:
✅ Predictable payments
✅ Often lower rates than personal loans
✅ Good for fixed ADU costs
Cons:
❌ Equity required
❌ Less flexible than HELOC
🔄 2. Home Equity Line of Credit (HELOC)
What it is: A revolving credit line secured by your home, similar to a credit card with a variable interest rate.
Best for: Projects with uncertain or phased costs, or those who want flexibility.
| Feature | Details |
|---|---|
| Loan Amount | Varies by equity and lender |
| Interest Rate | Variable |
| Repayment Term | 5–20 years (plus draw period) |
| Funds Use | Borrow as needed during draw period |
| Risk Level | Moderate – home is collateral |
Pros:
✅ Pay interest only on what you use
✅ Flexible access to funds
✅ Great for ongoing or multi-phase ADU projects
Cons:
❌ Variable rates may increase
❌ Must track usage carefully
💰 3. Cash-Out Refinance
What it is: Replaces your current mortgage with a larger one, letting you “cash out” the difference in equity for your ADU.
Best for: Homeowners with favorable mortgage terms who want to roll ADU costs into their mortgage.
| Feature | Details |
|---|---|
| Loan Amount | Based on home value minus current mortgage |
| Interest Rate | Fixed or variable (new mortgage) |
| Repayment Term | 15–30 years |
| Funds Use | Lump sum received at closing |
| Risk Level | Moderate – new mortgage starts |
Pros:
✅ Potential to lock in better mortgage rate
✅ Consolidates debt
✅ Large lump sum available
Cons:
❌ Closing costs
❌ You start a new mortgage
🧱 4. Construction Loan
What it is: A short-term loan that covers building costs; funds are disbursed as construction progresses.
Best for: Ground-up or modular ADU builds.
| Feature | Details |
|---|---|
| Loan Amount | Based on project cost and appraisal |
| Interest Rate | Often higher, interest-only during build |
| Repayment Term | 6–24 months, then convert to mortgage |
| Funds Use | Draws during construction phases |
| Risk Level | Higher – requires contractor, timeline |
Pros:
✅ Tailored to building projects
✅ Interest-only payments during construction
✅ Convert to mortgage after completion
Cons:
❌ More complex approval process
❌ May require architectural plans and permits
🧾 5. Renovation Loans (FHA 203(k) or Fannie Mae Homestyle)
What it is: Loans specifically designed to finance home renovations or ADU conversions. Can be used to purchase and renovate a home or to modify an existing property.
Best for: First-time buyers or homeowners with limited equity.
| Feature | Details |
|---|---|
| Loan Amount | Based on after-renovation value |
| Interest Rate | Fixed |
| Repayment Term | Up to 30 years |
| Funds Use | Must be used for qualifying improvements |
| Risk Level | Moderate – strict requirements |
Pros:
✅ Can finance both purchase and ADU build
✅ Good for buyers with limited equity
✅ Federally backed (FHA or Fannie Mae)
Cons:
❌ Requires HUD-approved contractors
❌ Complex documentation process
🔍 Which Loan Type is Right for You?
| Your Situation | Recommended Loan Type |
|---|---|
| High equity, want fixed payments | Home Equity Loan |
| Need flexibility, phased project | HELOC |
| Want to refinance and cash out | Cash-Out Refinance |
| Building a new ADU from the ground up | Construction Loan |
| Low equity or first-time homebuyer | FHA 203(k) or Homestyle |
💬 Need Help Choosing?
ADU Link can walk you through your options based on:
- Your equity and credit
- The scope of your ADU project
- Your location in Massachusetts
- Available state or city programs
👉 Get free guidance or
📧 Email: [email protected]
ADU Link — Helping Massachusetts Homeowners Understand and Navigate ADU Financing