Most San Diego homeowners fund an ADU one of four ways: a home equity loan or HELOC, a cash-out refinance, a construction loan, or straight cash — with a small number qualifying for a local program like the SDHC ADU Finance Program. We’re a design-build contractor, not a lender, so we won’t tell you which one fits your situation. What we can do is lay out how each option actually works so you know what to ask a lender or financial advisor.
The options at a glance
| Option | What it is | Best fit when |
|---|---|---|
| HELOC / home equity loan | Borrow against equity in your primary home | You have substantial equity and want to draw funds as construction progresses |
| Cash-out refinance | Replace your mortgage with a larger one, take the difference in cash | Current rates are close to or better than your existing mortgage rate |
| Construction loan | A loan structured around the build, often disbursed in stages | You have less equity, or want financing tied to draw schedules |
| SDHC ADU Finance Program | City of San Diego program for income-qualified, owner-occupant homeowners | Your household income and property meet the program’s specific eligibility rules |
| Cash | Paying out of pocket, no financing involved | You’d rather skip financing costs and have the capital available |
Every option below has real tradeoffs. None of them is automatically the “right” one — that depends on your equity position, your timeline, and your broader finances.
Home equity loan or HELOC
A HELOC lets you borrow against equity already in your primary home and draw funds as needed, paying interest only on what you use. A home equity loan gives you a lump sum instead of a line of credit. Both leave your existing first mortgage untouched, which matters if you locked in a low rate before rates moved.
The tradeoff: your home is the collateral either way, and how much you can borrow depends on your current equity and your lender’s loan-to-value limits — not on the ADU’s projected value once it’s built.
Cash-out refinance
A cash-out refinance replaces your current mortgage with a new, larger one and hands you the difference to fund construction. This only makes sense if the new rate on your entire mortgage balance is one you’re willing to accept — you’re not just financing the ADU, you’re resetting the terms on the home you already own.
That’s a bigger decision than it looks like on paper. A lender can model what a new blended rate does to your monthly payment; that math should happen before you commit to a construction budget, not after.
Construction and renovation loans
A construction loan is built around the project itself, typically released in draws tied to construction milestones rather than paid out as one lump sum. Some of these loans can underwrite against the home’s value after the ADU is built rather than its value today, which matters if you don’t have much equity yet. Renovation-loan products like FHA 203(k) or Fannie Mae HomeStyle work on a similar principle, though eligibility and terms vary by lender and property.
The tradeoff is complexity: draw schedules, inspections between draws, and often a conversion step into a permanent mortgage once construction finishes.
San Diego–specific programs worth asking about
SDHC ADU Finance Program
The San Diego Housing Commission runs a construction-to-permanent loan program specifically for ADUs: up to $250,000, at 1% interest during construction, converting to a 4% fixed rate for 15 years once the project is complete.
This program has real eligibility limits on both sides, not just one:
- ✓The homeowner applicant must have an annual household income at or below 80% of San Diego’s Area Median Income (roughly $97,000/year for a family of four, per SDHC’s published figures) — this is not a program for every income bracket
- ✓The homeowner must occupy the primary home as their residence, on a detached single-family property within the City of San Diego
- ✓A minimum 680 credit score and a 1% owner contribution toward the construction loan amount are required
- ✓Once built, the ADU must remain affordable to tenants earning up to 80% of area median income for seven years
That last point is a real, binding commitment — worth reading the full program terms before assuming it fits a rental-income plan, not something to skim past.
CalHFA ADU Grant Program
CalHFA’s statewide program has offered grants up to $40,000 toward predevelopment costs — design, permits, site prep, impact fees. As of this writing, that program’s funding round appears fully allocated and it does not look like it’s accepting new applications — confirm current status directly at calhfa.ca.gov before counting on it in a budget.
Cash and personal savings
Paying out of pocket avoids interest, underwriting, and draw schedules entirely. The real question isn’t whether you can pay cash — it’s whether that’s the best use of the capital compared to financing at whatever rate is available to you. That’s a question for a financial advisor, not a contractor.
What actually determines which option fits
- ✓How much equity exists in your primary home right now
- ✓Whether resetting your primary mortgage (as with a cash-out refi) makes financial sense for you
- ✓Whether the ADU is meant to generate rental income, and how a specific lender treats that income in underwriting
- ✓Your timeline — some loan products fund and close faster than others
- ✓Whether your household income and property qualify for a program like SDHC’s, which has real eligibility restrictions, not just a general interest requirement
We don’t project or guarantee rental income, financing approval, or return on investment. Those depend on your property, your lender, the market, and your personal finances — all of which belong in front of a mortgage professional and, where relevant, a tax advisor.
Where financing meets project planning
The one place financing intersects with our process directly: knowing your budget range before the feasibility phase lets us have a realistic conversation about what ADU type and scope actually fit that number. Construction alone typically runs $375–$600 per square foot in San Diego, before design and permit costs — worth reviewing before you lock in a loan amount. We’re not going to design a project first and hope the financing works out afterward.
Schedule a consultation and bring your budget range — we’ll talk through what’s realistic for your property within it.
Frequently asked questions
Related reading
- ✓How Much Does an ADU Cost in San Diego?
- ✓ADU Builders in San Diego (service page)
- ✓San Diego ADU Permit Process: What Homeowners Should Expect
- ✓Planning an ADU for Rental Income in San Diego
- ✓ADU vs. Room Addition: Which Is Right for Your Property?
