Which way of paying for it costs least.

For most homeowners it is a home-equity product rather than a refinance, because it leaves the existing first mortgage untouched. If you locked a low rate years ago, refinancing to fund an ADU reprices your entire balance at today’s rate — often costing far more over five years than borrowing the smaller amount separately. The exception is when your current rate is close to or above prevailing rates, in which case a cash-out refinance can win.

A HELOC has a variable rate and a draw period, so you pay interest only on what you have actually drawn — useful during construction when costs land in stages. A home equity loan is fixed-rate and fully drawn at closing, so the payment never moves. HELOCs typically price lower at the outset; the fixed loan buys certainty. Both are second liens and both leave your first mortgage alone.

Only if your existing mortgage rate is close to current rates. A refinance replaces your whole loan, so the new rate applies to the entire balance, not just the new money. A homeowner with a 3.5% first mortgage who refinances at today’s rates usually pays dramatically more over five years than one who takes a second lien — even though the refinance shows a lower headline rate than a HELOC. This tool ranks by five-year cost including closing, which is where that reverses.

Enough that the new borrowing plus your existing mortgage stays within the lender’s limit. Home-equity products generally allow combined borrowing up to about 85% of your home’s value; cash-out refinances are usually capped nearer 80%. Renovation loans are the exception — they can qualify against the home’s value after the ADU is complete, which helps when current equity alone would not cover the project.

Renovation mortgages such as FHA 203(k) and Fannie Mae HomeStyle finance improvements as part of the mortgage, and both recognise ADU construction as an eligible improvement. Their advantage is qualifying against after-completion value rather than today’s equity. The trade-offs are more paperwork, contractor requirements, and pricing slightly above a standard 30-year mortgage.

Because the lowest rate frequently is not the cheapest option. Rate ignores how much principal it applies to, over what term, and what closing costs were paid to get it. A refinance can advertise a lower rate than a HELOC while costing far more, because it reprices your entire balance and carries closing costs around 2% of the loan. Total cost over a realistic holding period is the honest comparison.

Yes, and we show the adjustment explicitly rather than hiding it. Excellent credit takes no adder; good credit adds about 0.35 of a percentage point; fair credit about 0.85. Those are typical market spreads, not offers — your actual pricing depends on the lender, your income, and the loan size.

Sometimes, and it is worth checking rather than assuming. In many California markets rent on a detached ADU is close to, or above, the monthly payment on the money borrowed to build it — but that depends on your rate, your term, and how much you finance. A 20-year home-equity payment is materially higher than a 30-year one. Run the rent estimate alongside this to compare real numbers rather than a rule of thumb.