How to Finance an ADU in Austin: Loans, HELOCs & Options (2026)

Paying for Your ADU: What Are Your Options?

Most Austin homeowners don't have $150,000+ in cash sitting around for an ADU project. The good news: there are several financing options specifically suited for ADU construction, and lenders are increasingly familiar with these projects.

Option 1: Home Equity Line of Credit (HELOC)

The most popular choice for Austin ADU projects.

• How it works: You borrow against the equity in your existing home. Draw funds as needed during construction.
• Typical rates (2026): 7-9% variable APR
• Pros: Flexible draw schedule (you only pay interest on what you've drawn), no closing costs at many lenders, fast approval (2-4 weeks)
• Cons: Variable rate means payments can increase, requires significant home equity (typically 80% combined LTV max)
• Best for: Homeowners with substantial equity who want flexibility

Option 2: Cash-Out Refinance

Replace your existing mortgage with a larger one and pocket the difference.

• Typical rates (2026): 6.5-7.5% fixed (30-year)
• Pros: Fixed rate locks in your payment, potentially lower rate than HELOC, one monthly payment
• Cons: Higher closing costs ($3,000-$8,000), restarts your mortgage clock, takes 30-45 days to close
• Best for: Homeowners whose current mortgage rate is already high (above 6%) — you're not giving up a low rate

Option 3: Construction Loan

A specialized loan designed for building projects.

• How it works: The lender disburses funds in stages as construction milestones are met. Converts to a permanent mortgage upon completion.
• Typical rates (2026): 7-10% during construction, then converts to 6.5-7.5% fixed
• Pros: Funds are disbursed directly to the contractor (reduces risk), can finance the full project cost
• Cons: More paperwork and inspections, higher rates during construction, some lenders don't do ADU-only construction loans
• Best for: Larger ADU projects ($200K+) or homeowners without enough equity for a HELOC

Option 4: Home Equity Loan (Fixed Second Mortgage)

Similar to a HELOC but with a fixed rate and lump-sum disbursement.

• Typical rates (2026): 7.5-9.5% fixed
• Pros: Predictable fixed payments, good if you know exactly how much you need
• Cons: Less flexible than a HELOC (you get the full amount upfront), slightly higher rates
• Best for: Homeowners who want payment certainty and have a firm construction budget

Option 5: Personal Loan or 401(k) Loan

For smaller projects like garage conversions.

• Personal loan rates: 8-15% depending on credit
• 401(k) loan: Borrow up to $50,000 from your retirement account at low interest (you're paying yourself)
• Best for: Projects under $100K where speed matters and equity is limited

How Lenders Value ADUs

This is changing fast in Austin's favor. Traditionally, lenders wouldn't count projected ADU rental income when qualifying you for a loan. That's shifting:

• Fannie Mae now allows projected ADU rental income to be counted for qualifying (up to 75% of projected rent)
• Some local credit unions in Austin are offering ADU-specific loan products that factor in the rental income from day one
• After the ADU is built and rented, you can refinance based on the increased property value, often pulling out most or all of your construction cost

Tax Benefits

Don't overlook the tax advantages:

• Mortgage interest deduction: Interest on loans used to improve your property is generally deductible
• Depreciation: If you rent the ADU, you can depreciate the structure over 27.5 years, reducing your taxable rental income
• Property tax: Your property taxes will increase, but the rental income typically far exceeds the tax increase

Always consult a tax professional for advice specific to your situation.

Which Option Is Best?

For most Austin homeowners in 2026, a HELOC is the best starting point. It's fast, flexible, and lets you draw funds as construction progresses. If you locked in a low mortgage rate (below 5%) in 2020-2021, a HELOC lets you keep that rate while funding your ADU project separately.