How much equity do I need for a HELOC?

Most ADU-friendly lenders cap combined loan-to-value at 80–90% after the ADU is built. Practically, you typically need at least 25–30% equity in your existing home before construction. The post-build appraisal can unlock additional capacity once the ADU is complete.

Can my HELOC rate change during construction?

Yes — HELOCs are typically variable, tied to Prime. If the Fed raises rates mid-build, your interest cost rises. Some lenders offer a fixed-rate conversion option for a portion of the balance; ask up front if rate stability matters to you.

Will lenders count my ADU's future rental income?

Yes — as of 2024, Fannie Mae and Freddie Mac allow lenders to factor projected ADU rental income into loan qualification using a fair-market-rent schedule (1007 form). Ask specifically: 'Do you underwrite ADU rental income on the appraised value?' If yes, you may qualify for a higher line.

Financing — HELOC

HELOC: the most popular way to fund an ADU.

A Home Equity Line of Credit is the most common ADU financing path for homeowners with substantial equity. You draw against your home's equity as construction progresses, pay interest only on what you actually use, and avoid disturbing your existing mortgage. Variable rates and an 80–90% combined LTV cap are the main tradeoffs.

How it works

A revolving line of credit secured by your home equity. You're approved for a maximum draw amount, then you pull funds as you need them — perfect for matching construction draws. After the draw period (typically 10 years), the loan converts to a repayment period.

Rate range: Prime + 0.5% to 2% variable (Dynamic Quality Builders 2026) — landing roughly 8–10.5% in mid-2025/2026 conditions
Loan amount: Up to 85% of home equity (combined LTV cap). Most ADU-friendly lenders cap at 80–90% combined LTV.
Term: Typically 10-year draw + 20-year repayment, total 30 years
Best for: Homeowners with 30%+ equity and a low-rate first mortgage they want to keep. The HELOC sits behind the existing mortgage as a second lien.

Application process

01Get pre-qualified informally during Phase 1 (planning) to size your maximum draw
02Submit the formal HELOC application during Phase 2 (design) — funding doesn't require permits
03Provide 2 years of W-2s, tax returns, asset statements, and existing mortgage info
04Lender orders appraisal; underwriting takes 30–60 days
05After approval, draw funds as construction progresses — only paying interest on the drawn balance

Pros

Fast approval (30–60 days) and often no closing costs
Interest-only payments during the draw period preserve cash flow during construction
No need to touch your existing first mortgage — keep your low rate
Flexible — you can use less than the approved amount if the build comes in under budget

Cons

Variable rate exposed to future Fed moves
Capped at combined LTV — usually 80–90%, less if you have a large existing mortgage
Second lien position means slightly higher rates than a refi
If home values drop, lenders can freeze or reduce HELOCs

Run the numbers on your specific loan

Use the loan calculator to compare HELOC, refi, construction, and renovation loans side by side with current rates.

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Alternatives and related

FAQ

How much equity do I need for a HELOC?: Most ADU-friendly lenders cap combined loan-to-value at 80–90% after the ADU is built. Practically, you typically need at least 25–30% equity in your existing home before construction. The post-build appraisal can unlock additional capacity once the ADU is complete.
Can my HELOC rate change during construction?: Yes — HELOCs are typically variable, tied to Prime. If the Fed raises rates mid-build, your interest cost rises. Some lenders offer a fixed-rate conversion option for a portion of the balance; ask up front if rate stability matters to you.
Will lenders count my ADU's future rental income?: Yes — as of 2024, Fannie Mae and Freddie Mac allow lenders to factor projected ADU rental income into loan qualification using a fair-market-rent schedule (1007 form). Ask specifically: 'Do you underwrite ADU rental income on the appraised value?' If yes, you may qualify for a higher line.

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