She’d already picked out the tile. Had a contractor she liked. Her in-laws were flying in from Corpus Christi to see the backyard before work even started. What she hadn’t locked down — not really — was how she was going to pay for the thing.
That conversation happened over the fence about eight months ago. I’m still thinking about it, because I’ve seen the same situation play out more than once on streets like Willow and Maple in East Austin, and in older neighborhoods west of downtown Fort Worth where the lots are deep and the city has quietly started loosening its ADU rules. People get excited about the project — understandably so — and treat the financing like a detail they’ll sort out later. It’s not a detail.
Here’s what I’ve actually observed, as someone who has borrowed money against a house more than once and watched friends and neighbors do the same.
The Three Paths, and What They Actually Feel Like to Use
There is no universally right answer here. The best option depends on how much equity you’re sitting on, what rates look like when you’re ready to move, whether your original mortgage is worth protecting, and honestly, how your stomach handles uncertainty. Let me walk through each one.
HELOC — The Flexible One
A Home Equity Line of Credit is basically a credit card secured by your house. You get approved for a line up to a certain amount — often somewhere around 80–85% of your home’s value minus what you owe — and then you draw from it as you need it. You only pay interest on what you’ve actually pulled out.
For a phased ADU build, that flexibility is genuinely useful. If your contractor frames the unit in month two and you’re not paying for finishes until month five, you’re not borrowing the whole amount on day one.
The catch right now is that HELOCs are typically variable rate. As of recent months, those rates have been sitting well above where they were two or three years ago, and they can move during your draw period. If you’re planning a build that stretches nine or twelve months, that’s a real exposure. I’ve heard from people in the Travis Heights area who started draws when their HELOC rate was one number and finished the project with a meaningfully different monthly payment. That’s worth pricing in.
Cash-Out Refinance — The One That Costs You Your Rate
If you bought your house before 2022, there is a very good chance you are sitting on a mortgage rate you will spend the rest of your life being grateful for. A cash-out refi replaces your existing loan with a new, larger one and hands you the difference in cash. It’s clean, it’s a fixed rate, and it’s genuinely simple to understand.
It is also the option most likely to make you wince when you run the numbers.
Trading a 3.25% first mortgage for a 7-something-percent loan on your entire remaining balance — just to pull out $80,000 or $100,000 for a backyard unit — is a painful trade for a lot of homeowners right now. Mortgage rates haven’t budged the way buyers hoped, and until that picture changes, the cash-out refi is the financing option I’d think about last if I had a low existing rate I was trying to protect.
Construction Loan — The One That Requires the Most Patience
A construction loan is a short-term loan that funds the build in stages as work gets completed. A lender typically sends an inspector out at intervals to verify progress before releasing the next draw. Once construction wraps, you either pay it off (often by rolling it into a permanent mortgage) or some products handle both phases as a single “construction-to-perm” loan.
These are the most administrative of the three options. Expect more paperwork, a more involved approval process, and a lender who wants detailed plans, permits, and a licensed general contractor before they’ll sign off. In a city like Austin, where ADU permitting has gotten more straightforward in recent years but still involves multiple city departments, adding a lender’s inspection schedule into the mix takes coordination.
That said, if you’re starting from scratch with little equity — maybe you bought recently and don’t have much to draw from — a construction loan might be your only real path.
The Numbers You Need to Run Before You Choose
Before you sit down with a lender, gather these:
- Your current mortgage rate and remaining balance — this tells you immediately whether a cash-out refi is even worth entertaining
- Your home’s current market value — a rough appraisal or a recent comp on your street gives you your equity ceiling
- Total project estimate — get this from at least two contractors, not one, and add 15% for the surprises that always happen
- Your monthly cash flow tolerance — a HELOC’s variable payment during a 12-month build adds uncertainty; make sure your budget can absorb a rate move
Last I checked, ADUs in Austin were running somewhere in the $150,000–$300,000 range depending on size and finish level, though I’ve seen simpler detached units come in closer to $120,000 on the lower end. Garage conversions can be less. Those numbers move with material costs, so treat them as a starting point for your conversation, not a budget.
What the ADU Actually Does to Your Property Value (and Your Taxes)
This part matters and people often don’t think about it until after the fact.
Adding a legal, permitted ADU in most Texas markets will bump your appraised value — which means it will bump your property taxes. Travis County reassesses regularly, and a finished casita in the backyard is exactly the kind of improvement that shows up in the next appraisal cycle. If your taxes are already feeling heavy, that’s worth factoring into the math before you build.
On the other side of the ledger: rental income from an ADU can meaningfully offset your financing costs, and in neighborhoods near the UT campus, South Congress, or in desirable pockets of Fort Worth near the cultural district, demand for that kind of space is real. That doesn’t make the project automatically pencil out, but it’s a variable worth putting in the spreadsheet.
Before You Call a Lender
Get the city piece sorted first. Confirm your lot qualifies for an ADU under local zoning, check setback requirements, and understand your permit timeline. In Austin, infill development has been an active policy conversation for a while now, and the rules have shifted more than once. What was true for your neighbor’s property two years ago may not be true for yours today.
Then get quotes from at least two or three lenders — not just your current mortgage servicer — and ask each of them to spell out the total cost of the loan over the life of the project, not just the rate. A slightly higher rate with no origination fees can beat a lower rate with points, depending on how long you hold the loan.
My neighbor eventually went with a HELOC. She accepted the variable rate risk because her equity position was strong, her build timeline was short, and she wasn’t willing to give up the mortgage she has on her main house. Her in-laws moved into the casita in February. The tile looks great.
That was the right call for her situation. Yours might point somewhere else entirely — and the only way to know is to run the actual numbers before you fall in love with the finish-out.