Interest Rates are High, but ADUs are Still Worth Considering

Many homeowners are feeling cautious this fall about borrowing money for big home renovations. With interests rates still at a 15-year high, having more than doubled in the first nine months of the year, homeowners might be unsure whether now is the right time to invest in an accessory dwelling unit. But there are still a few really good reasons to consider building an ADU right now, despite economic uncertainty.

1. What goes up must come down

Economists estimate that interest rates should be reaching a peak, and are likely to come down within the next 12-18 months. If a homeowner were to begin the process of building an ADU now, it could take eight months simply to design and permit depending on the type of unit. These early steps of the process could be completed with cash savings or ADU grant funds - by which point, interest rates may have fallen again, and it may be easier to borrow capital. 

2. There are forgiving financing options available.

You can put some funds towards temporarily buying down the interest rate this year and next year, which will give you plenty of time to refinance once interest rates are back down. Most construction loans are temporary, and there are some lenders who allow you to refinance once construction is completed and interest rates are down again - like CrossCountry Mortgage (a Casita member). 

Deferred payment loan programs, such as the City of Oakland’s ADULP program to help homeowners bring unpermitted units back into compliance, have extended timelines with no payments required and very low interest rates for certain homeowners. Reverse mortgages are another way to fund an ADU project and avoid high monthly loan payments–and can even be used for an ADU on a different property from the main home.  And don’t forget to check out your local credit union–several have new ADU-specific second-position loans that keep your first mortgage interest rates in place.

3. Improved cash flow is just one of the benefits of an ADU project.

If your main goal is to bring in rental income from your ADU, the sooner you get started, the sooner the extra cash flow will kick in, which could help alleviate some of the financial stress higher interest rates can cause. Will your project pencil out and provide income? How long will it take to pay off the ADU’s cost to construct? Resources like Napa Sonoma ADU Center’s online calculator can help you run the numbers.

Whether you plan to rent out your ADU or not, an ADU in most areas of California will ultimately add to a property’s resale value significantly. And if you want to use it to house family or community members, you’ll be engaging in one of the longest-standing traditions for tough times: co-living. Families survive and thrive by taking advantage of their home equity, creating more living spaces and sticking together to become more financially resilient. 

4. Building now may mean more labor availability.

Labor shortages in the construction trades have added to costs and timelines in recent years. Choosing to proceed with a project while interest rates are higher may mean an easier time finding and scheduling your architect, contractor and tradespeople.