Two ways to tap your home equity – but only one lets you keep a pandemic-era mortgage rate. Here’s how to pick the right path for your LA ADU project.
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Building an ADU in Los Angeles typically runs $150,000–$400,000+ all-in – that’s a meaningful capital commitment, and most homeowners don’t have that sitting in a checking account. The two most common ways to fund it with existing home equity are a HELOC (home equity line of credit) and a cash-out refinance. According to a CA YIMBY survey of roughly 800 ADU builders, about 43% of California ADU owners borrowed against home equity – via HELOC or cash-out refi – to finance their project.
Both work. The right choice depends heavily on your existing mortgage rate – a detail that matters a lot right now.
HELOC: a second lien on your home. You borrow only the new money you need, your original first mortgage stays untouched, and you keep whatever rate you locked in – including a 3% pandemic-era rate. Variable rate, currently ~7–9%. Draw as needed; lower upfront costs.
Cash-out refinance: replaces your entire existing mortgage with a new, larger loan at today’s rate (~6–8% fixed). You get a lump sum. You lose your old rate – that’s the trade-off. Makes sense if your current mortgage rate is already high or you want a single fixed payment.
Neither works well if you have little existing equity. Both products typically cap your combined loan-to-value at 80–85%. If you’re equity-light, look at ADU loans based on after-renovation value.
A home equity line of credit sits behind your existing first mortgage as a second lien. Your current loan stays in place – same rate, same servicer, same payment – and the HELOC gives you a revolving credit line against the equity you’ve built up.
This is the key reason HELOCs are attractive right now. If you bought or refinanced between 2020 and 2022, you may be sitting on a 2.75%–3.5% mortgage rate. Refinancing your entire balance at today’s rates just to pull out ADU money would reset that rate to ~6–7% on your full principal – a painful swap. A HELOC lets you borrow only the new money at the higher variable rate while your original loan grinds along at its low rate.
Most HELOCs have a draw period (typically 10 years) during which you can borrow up to your approved limit, repay it, and borrow again – like a credit card secured by your house. ADU construction often takes 6–18 months, so having a flexible line rather than a lump sum can reduce interest on money you haven’t spent yet. After the draw period closes, you enter a repayment phase and can no longer draw.
HELOC rates are variable, typically tied to the prime rate. In 2026 that puts most HELOCs in the ~7–9% range. If rates rise further, your monthly draw payment increases with them. That’s a real risk to budget for, especially on a large ADU draw. Closing costs are usually modest – some lenders charge nothing or a few hundred dollars – compared to full refinance closing costs.
You’ll generally need a combined loan-to-value (CLTV) – first mortgage plus HELOC – of no more than 80–85% of your home’s current appraised value. For more on the full financing landscape, see our ADU financing guide for Los Angeles.
A cash-out refinance is exactly what it sounds like: you refinance your existing mortgage into a new, larger loan and pocket the difference as cash. The old loan is paid off and disappears. You have one loan, one payment, and – critically – a new interest rate on your entire balance.
If your current mortgage rate is already at 6% or higher, you’re not giving up much by refinancing – the new rate may be comparable. And you get a fixed rate for the life of the loan, which eliminates the variable-rate risk of a HELOC. If you want simplicity – one payment, one servicer, predictable monthly cost – a cash-out refi delivers that.
Cash-out refinance rates for primary residences with strong credit currently run approximately 6–8%, depending on LTV, credit score, and lender. Unlike a HELOC, a cash-out refi carries full closing costs: appraisal, title, origination fees, and escrow typically total 2–5% of the new loan amount. On a $500,000 refinance, that’s $10,000–$25,000 out of pocket (or rolled into the balance). Factor this into your cost comparison. For more on construction-specific financing options, see ADU construction loans in California.
You receive the cash in one disbursement at closing, which works well if your contractor requires a large deposit or your project is fully scoped. The UC Berkeley Terner Center puts the median California ADU cost around $150,000 – a cash-out refi is a clean way to fund that if the math on your existing rate makes sense.
| Factor | HELOC | Cash-Out Refi |
|---|---|---|
| Typical rate (2026) | ~7–9% variable | ~6–8% fixed |
| Lien position | Second lien | First lien (replaces old) |
| Keeps existing mortgage? | Yes – first mortgage stays | No – old loan paid off |
| Payment structure | Interest-only during draw; flexible | Fixed P&I from day one |
| Closing costs | Low or none | Full closing costs (2–5% of loan) |
| Rate risk | Variable – rate can rise | Fixed – predictable payment |
| Best when | You have a low existing mortgage rate | Your current rate is high or you want one fixed loan |
The honest answer is: it depends on your existing mortgage rate more than almost anything else. Here’s a simple decision framework:
Both products depend on meaningful existing equity. If your current LTV is already above 80%, or you recently purchased and haven’t had time to build equity, you likely won’t qualify for a line of credit large enough to fund an ADU. In that case, look at ADU financing options for low- or no-equity situations – some lenders will underwrite based on your home’s after-renovation value (ARV) once the ADU is built, which opens up more borrowing room without requiring the equity today.
Tell us about your property – we’ll check your lot, your equity position, and connect you with vetted LA ADU builders who work with homeowners at every equity level.
Request an intro to a verified builderWhichever route you choose, the process looks similar:
For a broader look at all the financing tools available – including CalHFA ADU loans, renovation mortgages, and construction-to-permanent products – see our complete ADU financing guide for Los Angeles.
Yes – that’s one of the main reasons homeowners with low pandemic-era rates choose a HELOC. Because a HELOC is a second lien, your original first mortgage stays completely intact at whatever rate you locked in. You only borrow the new money for the ADU at the current variable HELOC rate (~7–9%). The math often still favors a HELOC over resetting your entire mortgage balance to a 6–7% rate just to fund a $150,000–$300,000 project.
Most lenders cap combined loan-to-value (CLTV) at 80–85% of your home’s appraised value. To illustrate: if your home is worth $800,000 and your mortgage balance is $500,000, your current LTV is 62.5%. At an 80% CLTV cap you could borrow up to $140,000 in a HELOC or cash-out refi ($800,000 × 80% = $640,000 minus $500,000). The higher your home value and the lower your existing balance, the more you can pull. If your equity is thin, look at after-renovation-value (ARV) loans instead.
It depends primarily on your existing mortgage rate. If you locked in below 5%, a HELOC is usually the better tool – you preserve that rate on your main balance and borrow only the ADU construction cost at the variable HELOC rate. If your current rate is 5.5% or higher, a cash-out refinance at today’s fixed rates may cost you little extra while giving you a single predictable payment. Run the numbers for your specific balance, rate, and ADU budget; the difference can easily be tens of thousands of dollars over the loan life.
The primary risk is rate variability. HELOC rates are tied to the prime rate and move with it – if rates rise significantly during your draw or repayment period, your payment increases. A large draw for ADU construction could mean a meaningful payment jump in a rising-rate environment. Additionally, a HELOC is a second lien, so if you can’t make payments, the lender can foreclose. Only borrow what your budget can sustain at a rate meaningfully higher than today’s quote. If rate certainty matters more to you than protecting your existing mortgage rate, a fixed-rate cash-out refinance or construction loan may be safer.
Both products require meaningful existing equity – roughly 20–25% cushion above your current mortgage balance after the new borrowing. If you recently bought your home or are in a high-LTV position, you likely won’t qualify for a large enough line to fund an ADU. In that case, consider after-renovation-value (ARV) loans or renovation mortgages, which underwrite based on what your home will be worth once the ADU is completed rather than what it’s worth today. See our guide on financing an ADU with little or no equity for the full set of options.
Before you spend a dollar on permits, let us check your address — zoning, lot size, setbacks, overlays — and tell you straight whether an ADU is viable. If it looks good, we connect you with a vetted, California-licensed LA builder for a free on-site feasibility assessment. No cost, no commitment.
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