How to Use Your Home Equity to Fund an ADU or Big Project
Many homeowners are sitting on more equity than they realize. Used wisely, it can fund an ADU that pays you back. Used carelessly, it can put your home at risk. Here is how to think about it.
- Most lenders let you borrow up to a combined 80 to 85 percent of your home's value
- Your home is the collateral, so borrow with a plan
- Compare a HELOC, a home equity loan, and a cash-out refinance side by side
What equity is
Equity is what your home is worth minus what you owe. Lenders usually cap your combined loans at about 80 to 85 percent of the home's value. The calculator below shows a quick estimate.
Three common ways to borrow
- HELOC: a line of credit you draw from as you need it. Rates are often variable. Good for projects paid in stages.
- Home equity loan: a lump sum with a fixed rate and a set payment. Good when you know the full cost.
- Cash-out refinance: a new, larger mortgage that pays off the old one and gives you cash. It makes sense if the new rate is competitive with your current one.
Questions to ask before you borrow
- Will the project add income or value, and how much?
- Can I afford the payment if rates rise or the project runs late?
- What are the fees and the rate for each option?
- What happens to my first mortgage rate if I refinance?
Plan the project first
The best loan is the one sized to a real budget. We help you scope the project, check the numbers, and see what an ADU could earn. See ADU consulting, the ADU payoff guide, and construction loans explained.
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Common questions
How much equity can I borrow against?
Many lenders allow combined loans up to about 80 to 85 percent of your home's value. Your credit, income, and the lender's rules decide your actual limit.
Is a HELOC or a cash-out refinance better for an ADU?
It depends on your current mortgage rate, the cost of the project, and how you want to pay it back. Compare both with a lender.
What is the risk of borrowing against my home?
Your home secures the loan. If you cannot make payments, you could lose it. Borrow an amount you can repay comfortably.