How to Finance Your Small Home Project
But- How do you pay for it? Here are ways we've helped past clients pay for their small homes, the post below provides an overview of financing options available for small homes in Maine and Massachusetts.
Backyard ADUs do not represent any products mentioned below and our real estate finance experts are available to consult with homeowners on financing options.
Cash
Use funds from a savings account, CD, money market, checking account, or from an individual investment account.
Fannie Mae Construction Loan: “Home Style Renovation”
This can provide 30-year financing at a low mortgage rate without requiring a super high credit score! The mortgage is available when purchasing a house or doing renovations at a later date. The loan amount is based on the purchase price plus renovation cost or the post-construction appraisal value, whichever is less.
Home Equity Line of Credit (HELOC)
50% HELOC | 50% Cash
HELOC’s provide a secured loan that must be paid back over 10 to 20 years. Interest rates are a low as 3%. (and even lower for some)
Considerations:
How much equity is in your home?
Banks will try to keep the Loan-To-Value (LTV) ratio < 90%
Some banks will need to hold the primary mortgage
The ADU valuation may not be fully reflected in the bank’s LTV calculation
Home Refinance
50% Refi | 50% Cash
Refinancing your home and taking cash out.
Current rates are 2.9-3.2%
Up to 30-year term
ADU valuation may not be fully reflected in the LTV calculation
Specialty Bank Loan
Some banks will issue a custom private loan for the construction of the ADU. Terms of this loan will vary widely and will depend heavily on your credit profile and relationships with local banks. The best approach to secure a custom loan is to ask a local credit union or small bank. Start by asking the bank that holds your checking account. **ask Backyard ADUs about their network of lenders
Reverse Mortgage
Reverse mortgages allow you to borrow equity from your home without a requirement to repay the loan until you and/or your spouse no longer lives in the home. The loan provides a lump sum of cash to spend as you see fit or monthly payments. This is a great option to maximize the cash flow (income) produced by the ADU.
Interest rates are ~4-6%
Must be 62 years old or older
LTV & loan amount varies with age
Massachusetts’ Home Modification Loan Program
This program helps homeowners modify their homes to care for someone with a disability or to age in place. The person can be an unrelated tenant.
Can borrow up to 50k
0% interest
No payment is due until the house is sold
