ADU funding question

[Jennifer Smith]

Hello!

I am trying to decide between two strategies for funding an 80k ADU to be built in my backyard. What would you do?

I currently owe 265k on my 301k mortgage, in a house that is worth probably 350k right now. The ADU will probably add only 25-30k to my house at appraisal, based on comparable situations, but it's worth it to me for the rental income.

My plan is to complete this project, save money, and move and repeat the process in about a year - the ADU will turn this property into a rental that will cash flow approx $400.

Which, if any, of these funding options sounds smartest to you?

Option A: Cash out refi for approx 30k, then a HELOC for approx 55k.

Pluses: can do interest-only payments during construction, 10-year fixed rate on the HELOC at 5.25%

Minuses: Worry about refinancing/paying off the HELOC later, when I no longer live here - less favorable terms? Having to do several refis/appraisals? Waiting period?

Option B: HELOC for the full cost of the ADU, then refi after construction into a 30-year fixed.

Pluses: No variable rate worry

Minuses: There may be a shortfall between what I have taken out for the HELOC and what I can get for the 30-year fixed. I may have to make up that discrepancy before I can refinance. I will be able to put $1600/month into it, but between that and the one-year residency requirement on a 30-year fixed, I may be in this property for a WHILE.

Any thoughts? What would you choose? Would you even pursue this project right now?

[Jessica Lawrence]

Originally posted by @David T.:

@Pat Saperstein

What's are pros and cons of doing Heloc to do an ADU? I'm still trying to understand why one should go down the route of using a heloc vs a cash out refinance when building an ADU. Any info is greatly appreciated

Maxable has a nice blog post discussing several different options for financing ADUs: https://maxablespace.com/how-to-finance-a-granny-flat/