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Mark had $85K in home equity.
He needed $40K for an ADU build.
He chose a HELOC at 8.02%. It was the wrong choice. And it cost him $18,347.
Here's what he should've done instead (and what 67% of ADU builders get wrong).
Last week in Issue 04, you learned how to finance a tiny home with zero equity (USDA loans, land banks, city grants).
This week: what to do when you DO have equity.
Because when you own a home with equity, you've got two main options:
HELOC (Home Equity Line of Credit) - 8.02% variable rate
Home Equity Loan - 8.16% fixed rate
Choosing the wrong one can cost you $18,000+ over 15 years. Here's how to decide.
The $18,000 Decision
Mark had two choices for his $40K ADU:
HELOC (15 years, 8.02%):
Monthly payment: $382
Total interest paid: $28,760
Home Equity Loan (10 years, 8.16%):
Monthly payment: $486
Total interest paid: $18,320
Mark chose the HELOC. Here's why it cost him $18,347:
✅ Lower monthly payment ($382 vs $486)
❌ Paid $10,440 more interest
❌ Stayed in debt 5 years longer
❌ Total extra cost over 15 years: $18,347
The "cheaper monthly payment" trap caught Mark. Here's how to avoid it (after the ad break)
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The 2 Equity-Based Financing Pathways
Option 1: HELOC (Home Equity Line of Credit)
How it works: Borrow against your home equity as needed (like a credit card). Only pay interest on what you use.
Rates (Jan 2026): 8.02% average (variable)
Best for: Phased builds, renovations, or if you believe rates will keep falling throughout 2026.
Real story: Sarah used a HELOC to fund her $45K ADU in stages. Drew $15K for foundation, $20K for structure, $10K for utilities. Started at $380/month, dropped to $340/month as rates fell.
Monthly payment on $40K:
$382/month over 15 years
Option 2: Home Equity Loan (Fixed Rate)
How it works: Borrow a lump sum against your home equity. Repay over 5-15 years at a locked rate.
Rates (Jan 2026):
5-year: 7.97%
10-year: 8.16%
15-year: 8.10%
Best for: Single upfront payment, predictable budgets, protection from future rate increases.
Real story: Adam used a 10-year home equity loan at 8.16% to pay off $32K in credit card debt (24% APR) and fund a $35K ADU. New payment: $813/month. Old minimums: $1,100/month. Saved $287/month AND owns an asset.
Monthly payment on $40K:
$486/month over 10 years
Need tiny home financing? Get it here
Financing Red Flags (What to Avoid)
🚩 Red Flag #1: Builder financing above 12%
If a builder offers financing above 12%, you're overpaying. Compare to personal loans (9-14%) and home equity loans (7.97-8.16%). Many builders mark up rates by 2-4%.
🚩 Red Flag #2: Prepayment penalties
Avoid any loan with prepayment penalties. If you pay off early (rental income, refinance, sale), you shouldn't be punished.
🚩 Red Flag #3: Variable-rate loans when rates are falling
If the Fed is cutting rates (like in 2026), HELOCs can save you thousands. But if rates are rising, lock in fixed rates immediately.
🚩 Red Flag #4: No appraisal required
Some lenders skip appraisals to speed up approval. This can result in overlending (you borrow more than the tiny home is worth). Always get an independent appraisal.
🚩 Red Flag #5: Debt consolidation without a plan
Using a home equity loan to pay off credit cards only works if you stop using the cards. Otherwise, you're converting unsecured debt (credit cards) into secured debt (your home) and doubling your risk.
Skip the Research. Get the Roadmap.
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Next Week
That $20K container home on Alibaba?
It's actually $110K.
Next Tuesday.
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Warmly,
Cameron Jo’van
Founder, My Tiny Home Hub