Building an ADU can be a smart investment. But—whether you’re looking to house your family, create a rental income stream, or increase property value—financing an ADU requires careful planning. And, of course, the cost of the project will vary based on purpose, design, materials, and location. Here are a few of the common ways homeowners might finance an ADU in Oregon.
Finance with a Mortgage
If you are planning to build an ADU while purchasing a new home or refinancing your current property, you can bundle the costs into a single mortgage some common options include:
- Construction Loans. Designed specifically for building projects, construction loans provide funds in stages as the construction progresses. They often require more stringent approval processes but can be a suitable option for extensive ADU projects. When a building is finished using a construction loan, the loan typically converts to a traditional mortgage. That means, you’ll start making regular monthly payments that cover both principal and interest on the full loan amount unless you have a “construction-only” loan, in which case, you’ll need to pay off the entire balance in one lump sum once construction is complete.
- Renovation Loans. Loans like Fannie Mae HomeStyle Renovation or FHA 203(k) allow you to finance the cost of ADU construction within a mortgage refinance. There are, however, strict guidelines and underwriting standards, so a HUD-approved consultant is required to act as a liaison between the homeowner, contractor, and lender.
- New Home Purchase Loans. If you’re buying a home and plan to add an ADU immediately, some lenders will include ADU costs in the original mortgage.
This approach often provides lower interest rates and longer repayment terms, making it a cost-effective choice if the option is available.
Finance with Home Equity
If you already own a home and have built up some equity, you can tap into the value of your home to finance an ADU. The most common options include:
- Home Equity Line of Credit (HELOC). A HELOC works like a credit card, allowing you to borrow as much as you need (up to a certain limit). With a HELOC, you borrow against the equity in your home and have the flexibility to draw funds as needed during the construction process. HELOCs generally offer lower interest rates compared to other loan types.
- Home Equity Loans. Like HELOCs, these loans allow you to borrow against your home’s equity but provide a lump sum upfront with fixed repayment terms. This can be beneficial for homeowners who prefer predictable monthly payments. In fact, right now, we are offering a Home Equity Master Line loan promotion with a special introductory rate. We’ll even pay the standard closing costs on qualifying new Master Line accounts.
- Cash-Out Refinancing. This involves replacing your existing mortgage with a new one, often at a lower interest rate, and taking out additional cash based on your home’s equity. This provides a lump sum that can be used for the ADU project.
Using home equity can be cost-effective since these loans often have lower interest rates than unsecured loans. However, they may put your home at risk if you can’t repay the debt.
Finance Independently from Your Home
If you prefer to keep your ADU financing separate from your primary home, you have a few options. Some stand-alone options include:
- Personal Loans. Unsecured personal loans can be used to finance an ADU, though they typically come with higher interest rates and shorter repayment terms. This option might be suitable for smaller projects or when other forms of equity-based financing are not available.
- ADU-Specific Loans. Some credit unions and specialized lenders offer loans designed for specifically for ADU construction.
- Credit Cards.
- Government or Local Programs. Some cities and states provide grants, low-interest loans, or incentives to encourage ADU development.
Financing your ADU separately gives you flexibility and avoids tying additional debt to your primary residence, but that comes at a cost.
Each of these financing options has its pros and cons. So, before you commit to anything, talk with the Maps lending department and your financial advisors to determine the most cost-effective way to bring your ADU dreams to life. The best financing method for your ADU depends on your home equity, credit score, and long-term financial goals. Whether you are bundling it with your mortgage, leveraging home equity, or securing government funding, understanding your options can help you make a smart financial decision.
ADU Requirements in Oregon
In Oregon, regulations for ADUs vary by city and county. In the table below, you’ll find guidelines for Marion and Polk Counties. However, it’s important to note that specific cities within these counties may have additional or differing regulations. For example, the City of Salem has its own set of ADU standards, some of which are also listed below.
| Requirement | Marion County | Polk County | City of Salem |
|---|---|---|---|
| Permitting | Building permit required | Building permit required | Building permit required |
| Structure Type | Must be a permanent structure; no RVs or tiny homes on wheels | Must be site-built; manufactured homes not allowed | Must be site-built and meet zoning requirements |
| Size Limitations | Must be proportionate to the main home | Must be smaller than the main home | Maximum of 900 sq. ft. or 75% of main home’s size, whichever is smaller |
| Height Restrictions | Must comply with zoning district regulations | Maximum 25 feet for detached ADUs | Maximum 25 feet for detached ADUs |
| Kitchen & Bath Required | Yes | Yes | Yes |
| Designated Parking Required | No, except as otherwise required by local zoning | No, except as otherwise required by local zoning or if the ADU is intended as a short-term rental | No, except as otherwise required by local zoning |
| Number of ADUs Allowed | One per lot | One per lot | One per lot |
| Rental Use Allowed | Yes, subject to local zoning | Yes, subject to local zoning | Yes, subject to local zoning |
| Short-Term Rental Allowed | Minimum of 30 Days | Not specified | Registration, licensing, taxes, and safety inspections required. Annual fee of $50. |
| Zoning Compliance | Must meet local zoning and setback requirements | Must meet local zoning and setback requirements | Must meet local zoning and setback requirements |
Given that regulations can change and may vary within different jurisdictions, it’s essential to consult local planning departments or official county resources to obtain the most accurate and up-to-date information before proceeding with an ADU project.
Want more home improvement tips?
- Discover some affordable ways to refresh your home.
- Find out what a HELOC is (and how to use one).
- Learn the basic steps you should take before selling your home.