By: Sevki Topcu, Co Founder, HAVEN
More and more people are adding accessory dwelling units to their homes these days and for good reason! ADUs offer a host of benefits, from added income and increased property value to more space and privacy. If you’re thinking of adding an ADU to your home, this guide will tell you everything you need to know to get started.
1. What are accessory dwelling units and why are they becoming more popular?
Accessory dwelling units, also known as mother-in-law apartments, are becoming an increasingly popular way for homeowners to add value to their property. There are a number of reasons why they are gaining in popularity. First, they offer various benefits, from added income and increased property value to more space and privacy. Second, they are a great way to utilize underutilized space in your home. And finally, they can be a great investment, providing a steady stream of income for years to come.
2. The benefits of adding an ADU to your home
ADUs provide extra space for family members, visiting friends, and in-laws.
More and more homeowners are looking for alternatives to typical assisted living or elderly care facilities for an aging parent or loved one. ADUs allow aging parents to stay close to their families while keeping their independence in their own small homes within steps of caretakers.
ADUs can be rented long-term or short-term as independent units for extra income. This additional income not only can pay for the cost of the ADU itself but also provide additional cash flow to homeowners.
3. ADU Regulations
If you’re thinking of adding an ADU to your home, the first step is to research your local zoning regulations. This is important because you need to make sure that you are allowed to build an ADU on your property. If you have ever had to look up your local zoning regulations, you know that they are often lengthy and full of technical jargon. Sometimes the regulations may be hard to decipher.
In addition to the applicable Zoning Regulations, there may be other regulations depending on where you live that may impact the feasibility of building an ADU. For instance, if you are septic and/or well users, the Department of Health may restrict additional construction or require upgrading your septic system.
However, there are a few resources available at your disposal to help with this process:
- Your municipality’s zoning code enforcer: If you are just curious whether ADUs are allowed in your area, calling your Zoning Department might be the easiest way to find out. Information specific to your property might be harder to acquire with a short phone call as it often requires a couple of hours of work to determine eligibility for ADUs.
- Haven ADUs has a digestible version of ADU-related regulations on our website. Check it out and let us know if your city is not listed, we are always adding more cities to our database.
4. How to Finance your ADU project
There are a few different ways that you can finance your ADU project. You can take out a home equity loan, HELOC, construction loan, or cash-out refinance. Each option has its own set of pros and cons that you should consider before taking out a loan.
Home Equity Loan: A home equity loan is a second mortgage on your home. You can use the equity in your home to finance the construction of your ADU. The biggest advantage of taking out a home equity loan is that you will have a fixed interest rate for the life of the loan. This can help you budget for your project as you will know exactly how much your monthly payments will be. Home equity loans offer an attractive way to get access to extra cash when you need it, but they come at a price. The interest rates on these types of lending are usually higher than your first mortgage and there are also several other fees that may be associated with them such as appraisal or closing costs for example.
HELOC: With a HELOC, you can borrow against the equity in your home and get a revolving line of credit. This can be a good option if you are not sure how much money you will need for your project or if you need the flexibility to pay for other expenses during the construction process. The advantage of a HELOC is that you only have to pay interest on the amount of money that you borrow. The downside is that HELOCs often have variable interest rates which can make budgeting for your project more difficult.
It’s important to note that most lenders are likely to lend up to 85% of the value of your home, minus your first mortgage. If you have recently purchased your home and have not built up much equity, a HELOC may not provide you with enough money to finance the construction of an ADU.
Cash-Out Refinance: A cash-out refinance is a type of refinancing that allows you to borrow against the equity you have built up in your home to finance the construction of an ADU. This option will consolidate the finance needed for construction and your first mortgage into a single loan. However, it does require that you have built-up equity in your home in order to qualify. With most cash-out refinances, you will only be able to tap into up to 80% of your home’s current value. Additionally, you will likely face closing costs and higher interest rates than with other financing options. As a result, a cash-out refinance may not be the best option unless you are able to significantly lower your interest rate.
Construction Loan: A construction loan is a short-term loan that is used to finance the construction of your ADU. Construction loans typically have higher interest rates than other types of loans. Once the construction of your ADU is complete, you can then refinance the loan into a more traditional mortgage.
Lastly, there are new loan products out there that would lend you money based on the future value of your property, after your ADU is completed. These types of products are perfect for new homeowners who have not built enough equity to use HELOC or Home Equity Loan options. So if you are interested in this option, make sure to mention it during your initial consultation call and we will connect you with our financing partners!
Whether you are looking to add more space for family or friends, or just looking to generate income from the land you already own, ADUs are a great option to make the most out of your property. Haven also offers free consultation as a first step in exploring ADUs as an option for you. Visit our website for information https://havenadus.com to learn more.