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How To Finance In-Law Units; Flight To Safety Again

How To Finance In-Law Units; Flight To Safety AgainCA recently passed a bill (SB9) that eases zoning restrictions and makes it far easier for homeowners to add extra units to their properties. These units are known as Accessory Dwelling Units (ADUs), Granny Units, or In-Law Units.

Per the WSJ, there are some 2.5 million single-family homes in California that are eligible to have an ADU built on the property. In the best-case scenario, the addition of those ADUs would add approximately 500,000 units to the state’s parch-dry inventory reservoir. And – that in turn will make housing more affordable.

In light of that, I wanted to touch on some ways to finance these dwellings.

  1. Home Equity Line of Credit (HELOC). This is the fastest and simplest solution. But, HELOCs have variable interest rates that could climb significantly if inflation persists. In addition, HELOCs may not provide enough cash to complete a full extra unit – particularly in TX where HELOCs are limited by much lower loan-to-value restrictions.

  2. Cash-Out Refi. These loans have the advantage of fixed-rate financing, but they too are limited by LTV restrictions (80% loan-to-value in most cases). In addition, if borrowers already have very low fixed-rate financing, they may not want to refinance into a higher fixed-rate (although rental income from the extra unit can often be much higher than the increase in housing payment).

    NOTE: Borrowers can also do a combination of the above two methods – cash-out refi first, followed by a HELOC.

  3. Construction Loans. These loans require homeowners to get all of their plans and specs formally approved by regulatory authorities and then to get an appraisal based on the completion of those plans. Construction lenders will then loan the necessary funds for the construction of the extra unit in one or more “draws.” The drawback to these loans is their time and expense, as the loans cost more in terms of upfront fees; they often require a 2nd “takeout loan” when the construction is finished; and there is a lot more paperwork involved. They nonetheless are often the best option for borrowers who cannot access sufficient cash with the above options.

Flight To Safety Outweighs Inflation Concerns

Despite significant inflation concerns that are escalating because of the war in Ukraine and a strong jobs report today, rates still went down today! This is because the continued intensity of the war and its implications are alarming investors and sending them out of stocks and into the relative safety of bonds.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167