How to Finance an ADU in Colorado
Building an ADU is a significant investment. Understanding your financing options early can help you establish a realistic budget and make better decisions as you move from planning into design and construction.
For many homeowners, the conversation starts with four options: cash, a HELOC, a home equity loan, or renovation financing.
ADU Financing
Four Common Ways to Finance an ADU
01
Cash
Simple and straightforward.
Use available funds and pay for construction progressively as work is completed.
02
HELOC
Flexible access to home equity.
Draw from available home equity as funds are needed during construction.
03
Home Equity Loan
Predictable borrowing.
Borrow a lump sum against available home equity, typically with a fixed interest rate and repayment schedule.
04
Renovation Financing
Financing built around the project.
Certain renovation loan programs can consider the planned improvements and the property's as-completed value.
01 - CASH
The Simplest Path When Available
For homeowners with sufficient liquidity, cash is generally the most straightforward way to fund an ADU.
Paying cash removes the lender from the construction process. There are no loan approvals, lender-managed construction draws or financing-related inspections, and no interest expense associated with borrowing.
Paying cash also doesn't mean paying for the entire project upfront. Construction payments are typically made progressively as work is completed according to the project's payment schedule.
The decision to use cash is ultimately a financial one. Maintaining liquidity, selling investments and the opportunity cost of using available funds are considerations best discussed with your financial or tax advisor.
02 - HELOC
Flexible Access to Home Equity
A Home Equity Line of Credit (HELOC) allows homeowners to borrow against available equity in their home while generally leaving their existing first mortgage in place.
Unlike a traditional loan that provides the full amount upfront, a HELOC is a revolving line of credit. Funds can be drawn as they are needed during the draw period, and interest is generally charged only on the amount borrowed.
That flexibility can pair naturally with an ADU project because construction expenses occur progressively. Rather than borrowing the entire project cost at once, homeowners can draw funds as payments become due during construction.
HELOCs typically have variable interest rates, which means the interest rate and monthly payment can change over time. Available credit, loan-to-value requirements, draw periods and repayment terms vary by lender.
03 - HOME EQUITY LOAN
A Fixed Amount With Predictable Payments
A home equity loan allows homeowners to borrow a lump sum against available equity in their home while generally leaving their existing first mortgage in place.
Unlike a HELOC, the full loan amount is typically received upfront. Home equity loans commonly have fixed interest rates and scheduled monthly payments, providing greater predictability throughout the repayment period.
For an ADU project with a well-defined scope and budget, a home equity loan may be worth considering when a homeowner prefers to know the amount borrowed, interest rate and payment structure from the beginning.
Loan amounts, available equity, interest rates and repayment terms vary by lender and borrower.
04 - RENOVATION FINANCING
Financing Built Around the Project
Renovation financing provides another way to fund an ADU by incorporating the planned improvements into the lending process.
Unlike financing based primarily on existing home equity, certain renovation loan programs can consider the property's anticipated value after the improvements are completed. This may provide another option for homeowners who don't want to—or aren't able to—fund the entire project with cash or existing equity.
Because the financing is tied more closely to the construction project, the lender typically has greater involvement. Requirements may include plans and specifications, a construction contract, project budget, appraisal, contractor information, inspections and progress-based construction draws.
Requirements vary significantly by lender and loan program. Homeowners considering renovation financing should speak with a qualified lender early so financing requirements can be coordinated with the planning and construction process.
Other Ways to Finance an ADU
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger mortgage and provides the difference in cash.
Because your existing mortgage is replaced, it's important to consider the interest rate, closing costs and terms of the entire new mortgage—not just the additional amount being borrowed.
Personal Loan
A personal loan or line of credit may provide financing without borrowing against your home.
Because the loan is generally unsecured, borrowing limits may be lower and interest rates may be higher than financing secured by home equity. This may make personal financing more appropriate for a portion of an ADU project rather than the entire construction cost.
Colorado ADU Financing Programs
Colorado has established programs to help qualifying homeowners finance ADU construction.
Programs administered through CHFA may offer lending support for eligible homeowners and properties. Requirements and availability vary.
Learn more about Colorado ADU financing programs through CHFA.
Other Assets or Private Financing
Some homeowners may choose to use investments, other available assets, family financing or private lending to fund all or part of an ADU project.
These options can have financial, tax and legal implications. Before using investments or entering into a private financing arrangement, consider discussing the decision with the appropriate financial, tax or legal professional.
Financing Information Disclaimer: Stone Aspen Signature Builders does not provide lending, financial, tax or legal advice. The financing information on this page is provided for general educational purposes only. Loan programs, interest rates, eligibility requirements and lending terms vary by lender and may change over time. Homeowners should consult qualified lending, financial, tax and legal professionals regarding their individual circumstances.
LET’S START A CONVERSATION
Start With the Project. Not the Loan.
Financing decisions are easier when you understand the project. We will help you define what is possible on your property, create a realistic plan and provide the documentation your lender may require.