Dear Liz: We live in a high fire risk area and feel it is too risky to keep our home. Our daughter and her husband invited us to build an accessory dwelling unit on their property. With the tariffs, it is estimated the construction will cost about $600,000. We have a nest egg of about $1.3 million and could sell our current home for about $1 million (we still owe $235,000 on the mortgage).
Our advisor at the bank has recommended a “bridge loan” to pay for the construction, or we could use the money from the sale of our home and our savings, which makes us nervous. I know we need advice but are unsure where to turn.
Answer: You aren’t really facing a choice between financing the ADU and using your own resources. You’ll pay for it either way.
Bridge loans are short-term financing that typically must be repaid within a year, at most. Presumably, you would use your nest egg and/or your home sale to do that.
Another financing alternative would be a home equity line of credit or home equity loan, using your current home as collateral. The interest rate would be somewhat lower, and you wouldn’t be under the same time pressure to pay off the loan in case construction takes longer than expected. Still, the loan would need to be paid back, so the debt will reduce your resources.
If you were building or buying a replacement home, you could get a mortgage to pay off the bridge loan. But in this case you are probably pouring money into someone else’s property. Your daughter and her husband likely would own the structure that you build.
That’s not to say this is a bad idea — far from it. ADUs can help bring families closer and make caregiving easier, while allowing each generation some privacy. But understanding how this works — who pays and how, who benefits and how — can help with decision-making.
So yes, you need advice, and lots of it. You should be talking to a lawyer, a tax pro and a financial advisor who is a fiduciary (someone who is obligated to put your best interests first).
The lawyer can discuss ways to protect your investment in the ADU. The tax pro can advise you about the various tax consequences, including the likely bills for tapping your nest egg and selling your home.
A fee-only financial planner can discuss the options with you to figure out the best course. If you don’t already have an attorney and a tax pro, the planner can give you referrals.
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