There many financial products available to fund your ADU. Some common financing options are introduced below.

The City Plan Department does not offer financing services. This information is provided for reference only.

  • Cash-out Refinance

    • Any use

    • Installment credit

    • Fixed-rate

    This allows homeowners to refinance your mortgage for a larger amount dependent on the equity built on their property over time. The difference between the new mortgage amount and the original amount is paid to the borrower. With cash-out refinance, your original mortgage is repaid and combined with this new fixed-rate refinancing. Up to a certain percentage of the home value can be refinanced.

  • Home Equity Loan

    • Any use

    • Installment credit

    • Fixed-rate

    Also known as a second mortgage, a home equity loan is an additional loan payment on top of an existing mortgage. The loan amount is given as a lump sum, and repayment is based on a fixed interest rate over a term of five to thirty years.

  • Home Equity Line of Credit (HELOC)

    • Any use

    • Revolving credit

    • ARM

    A HELOC is typically a second loan in addition to your existing 1st mortgage. If you don’t have a mortgage, a HELOC can act as a line of credit that enables you to borrow as you need funds to complete your ADU. HELOCs typically have a “draw” period followed by a repayment period and are generally adjustable rate loans. Interest rates can vary widely based on credit, loan-to-value, prevailing rates, and other factors, and interest rates fluctuate during both the draw period and the repayment period.

  • Construction-to-Permanent Loan

    • All types of ADUs

    • Revolving credit

    • Fixed-rate or ARM

    This combines an existing mortgage with the new loan. The construction loan term varies from 6 months to 2 years, during which interest-only payments are required. After this, the loan converts to a permanent loan, with options for fixed-rate lending or ARM.

  • 203(k) Rehabilitation Mortgage

    • All types except new-build detached ADUs

    • Revolving credit

    • Fixed-rate or ARM

    Offered by the FHA, this renovation loan combines home refinancing as well as renovation costs. Fixed-rate lending or ARM are available. There is a limit of 6 months on the construction period, and all work must be carried out by a contractor. New-build detached ADUs are not eligible for this mortgage.

  • HomeStyle Renovation Loan

    • All types of ADUs

    • Revolving credit

    • Fixed-rate or ARM

    Backed by Fannie Mae, this loan is a good option for many types of renovation and construction. The loan amount is based on the appraised value of the project, and can be fixed-rate or ARM.

Equity: The difference between a house’s current market value and the homeowner’s remaining mortgage balance.

Installment credit: The total loan amount is given to the borrower in one lump sum; no further withdrawals are allowed.

Revolving credit: Allows the borrower to access loan funds in multiple transactions, up to a determined dollar limit.

Fixed-rate mortgage: The interest rate is determined at the time that loan is taken out, and stays constant throughout loan term.

Adjustable rate mortgage (ARM): The interest rate changes throughout loan term depending on different factors including introductory period and index interest rate.

Federal Housing Administration (FHA): Government agency that regulates and insures loans from private lenders. FHA loans generally have lower credit score requirements.

Fannie Mae: A common name for the Federal National Mortgage Association, a government-sponsored enterprise that purchases mortgages from lenders to lower their risk and allow low- and moderate-income borrowers to have wider access to financial products.

Key Terms

Additional Resources

  • Casita Coalition ADU Financing Guide

    This guide gives an overview of many different financing pathways with advantages and drawbacks of each. Some information is specific to California ADUs, and may not apply in New Haven.

    PDF

  • NHS Homebuyer Education

    The Neighborhood
    Housing Services offers free financing workshops for homebuyers. Here you can learn more about responsible budgeting and avoiding financial pitfalls.

    Workshops

  • Fannie Mae

    There are multiple options for ADU financing backed by Fannie Mae. Learn more about all their ADU mortgage products, including the Homestyle Loan, here.

    Learn more

  • HUD 203(k) Rehab Mortgage

    The Department of Housing and Urban Development (HUD) has specific criteria for the eligibility of the 203(k) mortgage. Read more below.

    Learn more

  • Home Equity Loans vs. HELOCs

    The Federal Trade Commission (FTC) offers an in-depth article on the know-hows of navigating the two types of home equity mortgages.

    Read here