The high cost of construction and the limited financial tools available to the typical homeowner are narrowing who can afford to take advantage of last year’s statewide legalization. iStock illustration

Accessory dwelling units are being touted as the latest solution to Massachusetts’ housing crisis, but the idea is running headlong into a knotty problem: construction financing.

Households looking to add ADUs face construction costs between $250,000 and $400,000. Most consumers can’t pay that out of pocket, so are forced to take out a second mortgage or utilize a home equity line of credit in the absence of dedicated loan products, and that puts limits on who can afford to build.

If a homeowner hasn’t lived in their home for very long, they won’t have much equity to tap using a HELOC or a home equity loan. And with the big run-up in home prices in the last six years, many homeowners may not have enough financial headroom to take on more debt without running into a lender’s debt-to-income ratio caps, experts say.

Additionally, these loans are often more expensive than the typical 30-year, fixed-rate home purchase loan. When customers are taking out a second mortgage or HELOC, the rates tend to be higher than a traditional mortgage. If current mortgage rates are at roughly 6 percent, HELOC rates currently available to aspiring ADU owners are closer to 8 percent according to Scott Bailey, cofounder of ADU builder Bequall.

Towns and cities reported 1,639 applications for ADU projects, and 1,224 were approved, according to a survey of local building departments by Massachusetts housing officials released in February.

That’s a big jump from the three ADUs per municipality per year being permitted 10 years ago, according to a pre-pandemic report by the Pioneer Institute covering 100 cities and towns in Greater Boston The state needs to produce around 222,000 homes by 2035 to keep up with demand, according to the Massachusetts Executive Office of Housing and Livable Communities.

“I think that is meaningful progress and it’s possible we’ll continue to ramp up those numbers,” said Andrew Mikula, a senior housing fellow at the Pioneer Institute. “Towns get used to going through the motions, and there’s a little bit of automatic standardization going on the local level because for a lot of towns, this was an unfamiliar territory beforehand. It also shows we need to go further on a couple of fronts, especially things like dimensional requirements and septic regulations.”

Concerns About Appraisals

Mikula’s research suggests there might be an additional wrinkle to ADU financing, as well: the appraisals that are a normal part of a lender’s process.

The valuations of these properties can affect how much financing a household can receive when looking to build an ADU. With lenders having little comparable sales data to rely on, units can be undervalued which increases the difficulty of securing financing.

The Pioneer Institute is advocating for efforts to be made to train appraisers on how to properly value an ADU as evidence from other states suggests that appraisers tend to undervalue ADUs according to the institute. More accurate appraisals could help expand the ADU financing process, Mikula said.

“Top of mind for me has been California, because they’re really leading the charge and making ADUs work at a scale, where you not only have options for consumers, but also comps for lenders and appraisers who are trying to make it easier for them to finance,” Mikula said. “It still costs, usually $300,000 or more at the end of the day to build one of these things. Most homeowners still can’t do that.”

For example, take a $500,000 home where the owners have 50 percent equity through a combination of paying down their mortgage and price appreciation. A lender might make let the owners take out half of that equity to do improvements on the property, said Bequall’s Baily, but with ADUs typically costing between $250,000 to $400,000, the owners would still face a big budget gap they’d have to fill out-of-pocket.

The most recent Census Bureau data shows only about a third of Massachusetts homeowners didn’t have a mortgage in 2024. A 2025 analysis by Bankrate.com found the average Massachusetts homeowner held just under $337,000 in home equity last year.

A statewide survey shows 1,639 applications to build ADUs were filed statewide in 2025, the first year the housing type was legalized on most single-family lots statewide. iStock illustration

State Programs Try to Plug Gaps

Banks and credit unions are receiving a lot of interest regarding financing the properties, most often from homeowners looking to make space for a family member, said Metro Credit Union President and CEO Robert Cashman.

“It is difficult,” he said about qualifying for financing. “You have some that qualify, and others, just because sheer nature of what it is [don’t]. It’s on a case-by-case basis.”

Two recent Healey administration initiatives hope to at least partly address these financing gaps.

Backed by $10 million in state bonding dollars, the Massachusetts Housing Partnership plans help homeowners pay for professional feasibility studies. Up-front costs to build an ADU can run between $30,000 and $50,000, Bailey said, covering things like architect’s and zoning consultant’s fees.

Sam Lattof

The state Executive Office of Housing and Livable Communities is also running an ADU design competition this winter to pick designs that can be made publicly available. These designs would also help homeowners streamline their permitting process as they would meet climate and accessibility requirements.

“That will help reduce some of the upfront design costs and uncertainty that often stop projects before they begin,” EOHLC Deputy Chief of Staff for Policy Eric Shupin said during a Pioneer Institute webinar on ADUs held las week. “So, instead of hiring a designer and starting with a blank sheet of paper, a homeowner can go download this design from a professional designer and then work with the building architect to adapt it to their site.”

MassHousing is also developing an ADU construction loan program. The quasi-public lender is dedicating several million dollars to provide low-cost subordinate mortgage loans designed to finance ADU construction, targeted toward low- and moderate-income homeowners who may not be able to access home equity financing.

The program will offer loans of up to about $250,000 for ADUs, and available to homeowners up to 135 percent of the area median income – around $200,000 in Eastern Massachusetts, according to Shupin.

“We know that ADUs are essentially their small development projects and undertaken by individual homeowners,” he said in the webinar. “The predevelopment costs can be high so we’re trying to reduce those barriers, step by step.”