Refinancing after building an ADU

[Devin Scott]

Hey all, I've got a SFH in Inglewood CA that I bought in 2019 because it had a massive old garage structure that could be converted to an ADU. I'm in the middle of that conversion now. I bought the property for $655k and putting in about $250k for the ADU (it's a 2-bed, 2-bath and needed new foundation and roof). I have a mortgage of about $490k, at 3.625%. Property should be worth about $1.3m once ADU is done and I would really like to be able to get my $250k ADU investment back out, which would require about 55-60% LTV. I have a few questions -
(1) could I get a 2nd lien so I can preserve the rate on my current mortgage?  
and (2) should I even do it?  If I can't just do a 2nd lien and instead refinance the whole thing at 6 - 6.5%, the marginal cost of pulling out that $250k is crazy because I'd be paying an extra 3% on the existing $490k.  I did rough math, I'd be effectively paying 12% on that $250k.  Ugh!  Just doesn't pencil out unless I can preserve my current rate on the principal that would stay in place.
Thanks!

[William Sing]

Hey Devin, congrats on building an ADU! It is not an easy process.

1) Yep you can do a HELOC or another line of credit that in 2nd position.

2) That is a tricky one. Sounds like you have done the math but the likelihood we get down to those rates again is relatively low. If you have the HELOC or something similar it would act like cash and would be a nice line of credit you can pay down if needed. I'd run the numbers and see where the breaking point is financing-wise to refinance it all in one.

[Robert Reynolds]

I would talk to a lender and run the numbers, but my guess is a HELOC may be your best bet to get some money out for your next investment.

[Clarence Johnson]

Congrats on the build, I built an ADU in Inglewood around 2020 as well.  Heloc is your best bet for preserving the primary rate and for flexibility in payment and liquidity in the future.  Unfortunately, ADUs do not add as much value as most people think, I jokingly say that appraisers look at them like a giraffe in the yard, they are worth something but they arent usually giraffe experts.  On the sales side our buyers have benefited from this as appraisals for SFRs with ADUs tend to come in low, we shrug our shoulders and get a price reduction.  As lenders are allowing use of ADU income I think the value add component will increase but for now they are cash cows.  Our 400 sq ft 1/1 is leasing at $2700 with midterm tenants, definitely consider this to avoid Inglewoods STR registration and to increase cashflow.