Do you have an older family member living in your home? You may want to have them move into another building on your property, which is known as an accessory dwelling unit or ADU. Some simply call it a mother-in-law unit.

Building a second dwelling on your property can be a fine way to add separate space so your in-law or other family member has their own living area outside but close to your home. So, adding another dwelling on your property sounds great. But how will you pay for it? You have several realistic options for funding outlined below.

Home Equity Loans and HELOCs 

The most popular financing method for ADUs is an equity loan or home equity line of credit. You can tap some of the equity in your home to build or make improvements in a second dwelling on your property.

Spending your equity on the second dwelling is usually a wise move because you are adding value to your property by adding another livable dwelling.

You can choose from two types of second mortgages: a home equity loan that provides you with a lump sum of cash with a fixed schedule for repayment; and a HELOC, which is a revolving credit line with shorter payment terms and (usually) a variable interest rate.

Both types are a good choice to pay for your second dwelling. Some homeowners may prefer getting all the money at once with fixed payment terms. But others like the flexibility of a HELOC with the lower interest rate in the first few years.

Cash-Out Refinance Programs

A cash-out refinance lets you refinance your mortgage to a lower rate and give you a lump sum of cash that you will repay over time on top of your mortgage payment.

This is an appealing option for homeowners who want to switch mortgage companies, snag a lower interest rate, or combine the expenses of the second dwelling construction into a current home loan.

If you opt for a cash-out refinance, your lender will look at the value of the home along with the principal left on the mortgage. If the property rose in value since you purchase it, you may be able to do a refinance for the current value and get cash according to the new equity balance.

Construction Loan

A construction or renovation loan can be a good option to finance your ADU. This is especially true for homeowners who lack equity in the home to do a cash-out refinance or second mortgage.

Adding a dwelling unit increases the value of your property, so the lender will have the appraiser compare the potential value of the home once you have the second dwelling built, compared to the current value.

Personal Line of Credit

Obtaining a personal line of credit can be a fine option for people who don’t have enough equity to qualify for a home loan that is secured by the home.

A personal line of credit has large as what you can get with a second mortgage. Also, there will be a higher interest rate, but it can be the way to go to build your ADU when traditional mortgage financing isn’t an option.

CDFI Loan Program

A Community Development Financial Institution loan has plenty of flexibility for people who want to build an ADU on their property. These loans let the potential income from an unbuilt second dwelling to count as income for the loan. This type of financing is a good fit if you plan to rent the unit.

In-House Financing

Some ADU companies have programs that may make building their units on your property more affordable. Some options include rent-share and in-house financing. Rent-share options have been used to great success by major companies such as Dweller.

These companies can install your prefab unit with no expenses for the homeowner. After the building is finished, the homeowner can purchase the unit back at a fair price.