Cash out refinance vs HELOC for ADU construction question

[Lee Gardner]

Hi all,

We're homeowners with no other investment properties, and we're planning on converting our detached garage to an ADU. My brother-in-law (who has a few rental properties) suggested we do a cash out refinance on our primary residence - which currently has enough equity in it to finance the entire ADU construction in Culver City/Los Angeles.

But after doing a bit of research, it sounds like going with a HELOC might be the better way to go, mainly because we don't start incurring interest until we actually use the financing.

My concern with a HELOC would be higher interest rates and possibly not being able to secure enough financing through a HELOC to pay for the whole construction.

After the ADU is complete and a renter is in place, we plan to refinance again. With the additional sq footage we would hopefully be able to buy another rental property elsewhere.

Any BP members with experience with this sort of endeavor, or words of wisdom with lending would be greatly appreciated.  Thanks!

[Chris Coleman]

@Lee Gardner you are correct about the pros of a HELOC in that you're only incurring interest on the amount you take out rather than an entire loan amount.

One thing to consider with HELOCs is that they can have a variable interest rate. So make sure you know the maximum amount the interest rate could increase, both annually and in total, and calculate what your monthly payment would be in this scenario to ensure that you would still be cash flow positive.

Of course, since we’ll likely be in a low interest rate environment for several more years, you’re probably pretty safe.