HELOC vs. Construction loan
If you're considering building an accessory dwelling unit (ADU) on your property, you're likely facing a significant financial decision: how to fund the construction of your new living space. Several financing options are available, but two of the most common are HELOC loans and construction loans. Both options have pros and cons, and it's essential to carefully weigh your options before deciding which route to take.
What is a HELOC loan?
A home equity line of credit, or HELOC loan, is a loan that uses the equity in your home as collateral. Essentially, a HELOC loan allows you to borrow against the value of your home, and you can use the funds for any purpose, including building an ADU. With a HELOC loan, you'll typically be approved for a certain amount of credit, and you can draw from that credit line as needed.
Pros of HELOC loans
One of the most significant advantages of a HELOC loan is that they're relatively easy to qualify. If you have home equity, you can get approved for a HELOC loan, even if you have less-than-perfect credit. Additionally, HELOC loans often have lower interest rates than other types of loans, making them an affordable option for financing your ADU.
Cons of HELOC loans
The main drawback of a HELOC loan is that it's a revolving line of credit, which means that you'll need to make minimum monthly payments on the loan, and the interest rate on loan can fluctuate over time. Additionally, because a HELOC loan is based on your home's equity, you could lose your home if you can't repay the loan.
What is a construction loan?
A construction loan is a type of loan specifically designed to finance the construction of a new building. With a construction loan, you'll typically receive a lump sum of money upfront, and you'll use that money to pay for the materials and labor needed to build your ADU.
Pros of construction loans
One of the most significant advantages of a construction loan is that you'll receive a lump sum of money upfront, making it easier to budget for your project. Additionally, construction loans are designed specifically for building projects, so they often have more favorable terms than other loans.
Cons of construction loans
One of the main drawbacks of a construction loan is that it can be challenging to qualify for. To be approved for a construction loan, you'll typically need a solid credit history, a significant down payment, and a detailed construction plan that outlines the timeline and costs of your project. Additionally, construction loans often have higher interest rates than other types of loans, and you'll typically need to pay off the loan in a shorter amount of time than you would with a HELOC loan.
So, which option is right for you?
Ultimately, deciding whether to finance your ADU with a HELOC loan or a construction loan will depend on your financial situation and goals. If you have equity in your home and want to minimize your monthly payments, a HELOC loan may be the best option. On the other hand, if you have a solid credit history and want to get a lump sum of money upfront to fund your construction project, a construction loan may be the better choice. It's important to carefully evaluate your options and talk to a financial professional before deciding.
