How Do I Finance My ADU?

By Buz Artiano, BuildX | October 2025

Everybody we talk to about building an ADU asks us the same question before anything else is discussed. It's always the question of how they will actually pay for the ADU. But what if you have equity in your home and you really want to build an ADU for family or for a rental, but the whole financing thing is confusing. There's too many options and not enough clarity.

We are very familiar with these concerns and we understand why you might feel that way. At BuildX, out of all the ADUs we have built in Massachusetts, financing is the subject that comes up every time without exception. The answer depends on three things. One, how much equity you have. Two, your age. And three is whether you want some oversight and help managing things, or if you prefer to do that yourself.

What Is the Most Common Way to Finance an ADU?

For most people that we work with, a HELOC is the least expensive and most practical option. The closing costs are very low, usually less than $2,000, and you only pay interest on money you have used, not the whole amount you are approved for. Because we build fast (100 to 110 days), you end up paying a lot less interest with a HELOC.

The most common situation is when someone in the family is selling a property that has significant equity. They get a HELOC on the existing home, use that equity to build the ADU, then when they move into it they sell the original house and pay off the line of credit. There's no prepayment penalties, so doing it this way brings your carrying costs down.

If you already have a HELOC with a good rate, you can keep that and get a second one. You're not limited to just the one.

Which Bank Should I Use for a HELOC?

The best deal usually comes from a local bank. Local banks go out of their way to approve equity lines because they want your other business as well. Things like checking accounts, savings accounts, etc. A lot of time they offer rates at prime minus one or two percent. But be sure and pay attention, there is one catch. Most local banks cap you at 80% loan-to-value.

If you need more than that, up to 90% of your home's value, you'll have to go through an actual mortgage company. Mortgage companies have easier underwriting but they have higher rates and higher fees.

The comparison looks like this:

When Does a Construction Loan Make More Sense?

If you don't have enough equity for a HELOC, or if you want professional oversight on the build, a construction loan is a good alternative. The caveat with this one is that there is more paperwork and inspections, but with that you also have more protection.

With a construction loan, the bank wants to see insurance documents. They want to understand the project and how it is being built. They use draw schedules that release money to you in smaller chunks as certain phases of the work are completed. This way shady contractors can't take money from you upfront and then disappear.

Always be wary of any contractor who wants a large amount of money upfront. Do your homework, check references, and read every contract very carefully. Having that bank oversight that a construction loan gives you can save you from expensive mistakes.

Can a Reverse Mortgage Pay for My ADU?

If you are 62 or older and plan to stay in your home long-term, a reverse mortgage can fund your ADU without monthly payments. It's different from a HELOC because the amount you can borrow is based on your age and property value and not your income.

Three things to understand about reverse mortgages:

• You have to live in the home as your primary residence.
• You still pay property taxes and insurance (no monthly mortgage payment, but you'll always have tax and insurance costs).
• It is a non-recourse loan, which basically means that your kids will never owe more than the home is worth after you're gone.

The closing costs for a reverse mortgage are a lot higher than a HELOC, usually around $7,000 to $15,000 depending on how much you borrow. HELOCs are pretty much always the cheaper way to go. But if you can't qualify for a HELOC because of credit or income issues, a reverse mortgage gives you another way to get money out of your home.

There is another option as well. If you've got a family member who has good credit, they can co-sign on a HELOC with you. That ends up being cheaper than doing a reverse mortgage.

What About State Programs and Grants?

Massachusetts has programs like HMLP (Home Modification Loan Program) that do subsidized or super low rate financing for ADU projects. They usually have income limits and paperwork requirements, but the rates are great.

State programs work best when you use them to pay for part of your project, not the entire build. You may still need a HELOC or one of the other financing options we talked about to cover the rest.

Is a HELOC Always the Right Choice?

It's true that most of our clients end up going with a HELOC, but that doesn't mean a HELOC is the right option for every situation.

If you don't have at least 50% equity in your home, you're not likely to get approved. And if your credit score is too low, you could get stuck with high interest rates. If you are 62 or older with limited income, a reverse mortgage may be the only option.

The financing option you decide on comes down to your situation. Your equity, your credit score, your age, and how much you need to borrow. There's no right answer for everyone.

How Do We Help You Figure This Out?

We partner with local banks and mortgage companies across Massachusetts who understand ADU financing. When you work with us, we connect you with lenders who have done this before and can evaluate your options quickly.

Our goal is to help you find the least expensive way to get the money you need, build fast so you end up paying less interest, and of course end up with an ADU that works for your family and that you love.