How To Use a HELOC To Fund Your ADU - Shawnluong Team

How To Use a HELOC To Fund Your ADU

Here’s what you need to know about using a HELOC to fund your ADU.

Recently, I’ve made a series of blog posts about Accessory Dwelling Units, or ADUs. These are additions to your home you can sell and rent out separately from your main property. These are a great way to invest in real estate for relatively cheap; however, many people have reached out and mentioned that they don’t have the cash on hand to create an ADU right now. Fortunately, I have the perfect solution to this problem. 

The good news is that banks are currently offering home equity lines of credit for investment properties. However, it’s important to note that not many banks provide this option, and they tend to have more stringent requirements compared to owner-occupied properties. For instance, a majority of these banks typically mandate a minimum FICO score of 720 or higher for access.

“ADUs are a great way to begin investing in real estate.”

Moreover, the combined loan-to-value ratio, considering both your primary mortgage and the equity line, usually should not exceed 70% to 80%. Additionally, the interest rates are generally tied to the prime rate and may be higher than those for owner-occupied properties. For instance, the interest rate for an owner-occupied property might be prime plus a quarter, while an investment property equity line could be prime plus one and a half. It’s essential to keep in mind that this higher rate is typically for short-term use, especially beneficial for construction purposes.

Despite the initial higher costs, utilizing a HELOC for short-term investment property financing makes sense, especially when considering its advantages over a traditional construction loan. The construction loan process, is more cumbersome, involves managing the disbursement of funds for various construction phases, such as foundation, framing, roofing, plumbing, and more.

Once the short-term requirements are fulfilled, you can transition to a home equity loan, which tends to offer lower interest rates. The positive aspect is that interest rates are currently trending downward, and by the time your construction is completed, you may secure an interest rate of around 5.5% to 6% for your investment property.

For further details or if you’d like to explore this option, feel free to reach out to me via text, call, or email. I’m here to provide more information and assistance.


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