How to Finance an ADU in Maryland: HELOCs, Loans & Cash-Out Refinancing

There is no single “Maryland ADU loan.” Homeowners may use cash, home equity, a refinance, or a renovation mortgage depending on their equity, existing mortgage, project scope and lender eligibility. The important step is to match the financing structure to the way the ADU will actually be designed, permitted and paid for.

This guide is educational, not a recommendation to borrow. Every option below places different costs and risks on the homeowner, and most are secured by the home itself. Compare written lender disclosures, fees, interest-rate structure, draw rules and total repayment—not just the advertised monthly payment.

Last verified: September 7, 2026. Loan programs, underwriting rules and lender overlays can change. Confirm current terms with an approved lender before relying on this page.

Quick answer: the main ways to finance a Maryland ADU

Before deciding how much to borrow, first run the Maryland ADU Property Feasibility Checker. If the project still looks workable, review the Maryland ADU Cost Escalation Guide so site work, utilities, delivery, permitting and other exclusions are not mistaken for an all-in quote; then build the actual budget with our Maryland ADU Cost Calculator & Bid Comparison. A lender can finance only what its program allows; it cannot make an incomplete contractor quote complete.

1. HELOC: flexible draws against home equity

A home equity line of credit is an open-end line secured by the equity in your home. During the draw period, the borrower can generally take advances up to the approved limit instead of receiving the entire amount at closing. CFPB guidance notes that many HELOCs use variable rates, so required payments can change as rates move.

That draw structure can fit an ADU project with staged payments for design, permitting, foundation, framing and finish work. But a HELOC should not be treated as a guaranteed construction reserve. CFPB also warns that a lender may restrict additional advances if the home value falls materially or the borrower’s financial circumstances change.

2. Home equity loan: a lump sum without replacing the first mortgage

A home equity loan also borrows against home equity, but it normally provides the proceeds as a lump sum and is commonly structured with a fixed interest rate. Unlike a cash-out refinance, it generally leaves the existing first mortgage in place.

This can be easier to budget when the homeowner already has a detailed fixed-price contract and wants predictable repayment. The tradeoff is timing: if the contractor needs money gradually over 12 months, the homeowner may be paying interest on funds that have not yet been spent.

3. Cash-out refinance: replace the first mortgage and extract equity

A cash-out refinance replaces the current mortgage with a larger first mortgage and pays some of the difference to the homeowner in cash. CFPB notes that this differs from HELOCs and home equity loans, which generally leave the original first lien intact.

The central question is not simply whether the new rate is “fixed.” It is whether replacing the existing mortgage produces a better overall borrowing cost than keeping that mortgage and adding a second-lien product. Closing costs and the interest rate applied to the entire new loan balance matter.

CFPB specifically warns that when prevailing rates are higher than a homeowner’s existing mortgage rate, a cash-out refinance can increase borrowing costs because the old low-rate first mortgage is replaced rather than preserved.

4. Renovation mortgages: FHA Standard 203(k) and Fannie Mae HomeStyle

Can projected ADU rent help you qualify?

Sometimes—but this is highly program-specific. HUD permits some actual or projected ADU rental income to be considered when underwriting qualifying FHA mortgages, subject to documentation and program limits. FHA’s 203(k) ADU policy also contains rules for projected rent in certain new-ADU scenarios.

Fannie Mae’s 2026 policy also allows ADU rental income in qualifying on certain one-unit principal-residence purchase and limited cash-out refinance transactions, subject to its underwriting requirements and limits. That does not mean every lender will count the rent you expect to earn from a future Maryland ADU.

Maryland-specific financing programs: useful, but not automatically ADU funding

The Maryland Mortgage Program offers an FHA Limited 203(k) product for qualifying Maryland homebuyers using eligible MMP first-mortgage products. The state currently lists up to $75,000 for eligible repairs, along with homebuyer-education, income, credit, purchase-price and property-ownership requirements.

Maryland DHCD also operates housing-rehabilitation and homeowner-repair loan programs for eligible households. Those programs are designed around critical repairs, code compliance, accessibility and rehabilitation—not as a general statewide program to finance a new ADU. Eligibility and allowable work should be confirmed with the program or local administering agency before assuming ADU construction qualifies.

Financing should follow feasibility—not replace it

A lender’s approval is not zoning approval. Before using home equity or paying renovation-loan fees, verify that the proposed ADU is viable under the rules that apply to the property.

• Run the Maryland ADU Property Feasibility Checker before paying lender or design fees.
• Start with the Maryland ADU Guide.
• Check enacted vs. pending local rules in the Maryland County ADU Rules Tracker.
• Estimate the size ceiling with the Maryland 75% ADU Size Calculator.
• If the property is on private utilities, use the Septic & Well Readiness Checker.
• Review the Maryland ADU Cost Escalation Guide before treating a builder or prefab quote as all-in.
• Build the budget and normalize bids with the Maryland ADU Cost & Bid Comparison Tool.

Before applying: questions to take to a lender

1. What lien position will this loan take? Will it replace my first mortgage or sit behind it?
2. Fixed or variable rate? If variable, what index, margin and adjustment limits apply?
3. What fees and closing costs apply? Compare APR and total costs, not only the note rate.
4. How is available equity calculated? Ask about appraisal, maximum LTV/CLTV and required reserves.
5. How are construction funds released? Lump sum, borrower draws, contractor draws, escrow or inspections?
6. Does the lender require final zoning/building approval before closing or before the first construction draw?
7. Can projected ADU rent be used to qualify? If yes, under which exact underwriting rule and documentation?
8. What happens if project cost increases? Determine whether the loan can change or whether the homeowner must fund overruns.
9. Are modular/prefab contracts acceptable? Confirm how factory deposits, delivery and site work fit the draw process.
10. What happens if the ADU permit is denied or delayed? Understand rate locks, extension fees and unused-fund treatment.

Primary sources used for this financing guide

• Consumer Financial Protection Bureau — What is a HELOC?
• CFPB — Home equity loan and cash-out refinance comparison
• Fannie Mae — HomeStyle Renovation
• Fannie Mae — Accessory Dwelling Units
• HUD — FHA 203(k) Rehabilitation Mortgage Insurance Program
• HUD — 203(k) process and draw stages
• Maryland Mortgage Program — FHA 203(k) Limited Loan
• Maryland DHCD — Housing Rehabilitation Financing

Maryland ADU Guide is an independent research publication. It is not a lender, mortgage broker, financial adviser or government agency. Verify loan eligibility, property-tax implications, ADU insurance requirements and repayment risk with qualified professionals before borrowing against your home.