One of the biggest questions homeowners ask is: "How do I pay for an ADU?" With costs ranging from $150,000-$350,000+, financing is a critical consideration. Here's your complete guide to ADU financing in California.

ADU Financing Options Overview

1. Home Equity Line of Credit (HELOC)

Most popular option for San Diego homeowners

How it works: Borrow against your home equity at variable rates
Typical rates: Prime + 0-2%
Pros: Flexible draw schedule, only pay interest on what you use
Cons: Variable rate risk, your home is collateral
Best for: Homeowners with significant equity

2. Cash-Out Refinance

Replace your mortgage with a larger one

How it works: Refinance for more than you owe, use difference for ADU
Typical rates: Current mortgage rates
Pros: Fixed rate, potentially lower rate than current mortgage
Cons: Closing costs, extends mortgage term
Best for: When refinance rates are favorable

3. Construction Loan

Short-term financing specifically for building

How it works: Funds disbursed as construction progresses, converts to permanent loan
Typical rates: Higher than standard mortgages during construction
Pros: Only pay interest during construction
Cons: Two closings (or one-time close option), more complex
Best for: Larger projects, new construction

4. Home Equity Loan

Lump sum second mortgage

How it works: Borrow fixed amount against equity at fixed rate
Typical rates: Slightly higher than first mortgage rates
Pros: Fixed rate, predictable payments
Cons: Less flexible than HELOC
Best for: Those who prefer payment certainty

5. FHA 203(k) Renovation Loan

Finance purchase and renovation together

How it works: FHA-insured loan includes renovation costs
Pros: Lower down payment, can include ADU in purchase loan
Cons: Mortgage insurance required, property must meet FHA standards
Best for: Buyers purchasing homes that need ADUs

California ADU Grants and Incentives

CalHFA ADU Grant Program (Historical)

The state previously offered up to $40,000 for pre-development costs. While this program's funding has been exhausted, new programs may emerge. Stay informed at CalHFA.ca.gov.

Local Incentives

San Diego periodically offers:

Fee waivers for affordable ADUs
Expedited permitting programs
Pre-approved ADU plans (reducing design costs)

Using Projected Rental Income

Some lenders will consider projected ADU rental income when qualifying you for a loan. This can help you qualify for a larger loan amount.

Typical San Diego ADU Rents:

Studio ADU: $1,500-$2,200/month
1-bedroom ADU: $2,000-$3,000/month
2-bedroom ADU: $2,500-$3,500/month

Tax Benefits of ADU Construction

Depreciation: Deduct the ADU's cost over 27.5 years
Operating expenses: Deduct utilities, repairs, insurance for rental portion
Mortgage interest: Deductible on loans used for rental property
Property tax: Only the ADU is reassessed, not your main home

Next Steps

Get an accurate cost estimate first—then explore financing. Contact One Stop Builders at (858) 567-0007 for a free consultation and detailed estimate for your San Diego ADU.

How to Finance Your ADU in California: Grants, Loans & Options [2026]