Small houses do not necessarily mean small prices.
- Owning a tiny house can be much cheaper than renting an apartment if you can pay cash, as it limits your monthly parking and moving costs.
- If you’re financing a small home, your monthly costs could be lower or even higher, depending on the type, size and terms of the loan.
- Downsizing to a smaller rental may be a better financial decision than buying a tiny home.
Renting is expensive. But at the same time own a house can be more affordable, purchase a house is not cheap. (And we even wonder if owning a home is actually cheaper – but that’s a different article.)
Some people circumvent the housing problem by downsizing – down to a small house.
Typically 500 square feet or less, tiny homes have grown in popularity over the past decade. These small homes can have lower prices than a new car, making them much more economical than even a cheap apartment. Most even come with wheels, making it easy to move around.
But is a tiny house really the solution to your housing problems? Like most other things in this country, it depends on how much money you can spend on the problem.
If you have money, it’s easy
For many people who go tiny, buying a tiny home involves paying a specialist builder a lump sum of cash for a custom build. By following this path, you will own your home. This means more monthly rent or mortgage payments for the house itself.
However, as stated above, most tiny houses have wheels, not foundations. So you will have to park it somewhere. Some prefer to buy cheap land and park on their own land. Others may park for free on a corner of a larger piece of land owned by friends or family. And still others choose to park at RV parks, either settling there for good or traveling from park to park.
Costs can vary greatly depending on the route you take. But even at the high end, your monthly parking costs for a tiny home will likely be significantly lower than the rent for an apartment or house in the same neighborhood. (However, if you frequently move your tiny house, this could incur additional costs.)
Of course, if you don’t have the cash to buy a $30,000 to $150,000 tiny house, the math gets a lot more complicated.
The problem of financing tiny houses
Simply put, financing a tiny home is difficult. The typical tiny house is actually classified as an RV, not a house. So unless it has a steady foundation – which most don’t – you simply can’t get a mortgage for a tiny house.
Your main option for financing a tiny home is to qualify for an RV loan. Unfortunately, finding a lender can be difficult, as few banks offer RV loans. Alternatively, you could try getting a personal loan, as they are much easier to find, but this has its own set of issues.
In terms of cost, an RV loan will almost always be the more affordable option of the two. Since RV loans are secured – meaning your RV (or small house, in this case) acts as collateral – they can therefore have much lower interest rates than unsecured personal loans. guaranteed. If you have good credit, you can find RV loans with rates similar to regular auto loans.
Your monthly payment will depend on the terms of your loan. Some lenders offer a maximum term of 10 years on RV loans, while others offer terms up to 20 years. The shorter your loan, the higher your monthly payment will be, but the less interest you will pay over the life of your loan.
Whether your monthly payment is less than rent in this situation will depend a lot on the details of your loan. (And you’ll still need to add the cost of parking your tiny house, plus any associated moving costs to move it.)
If you choose to go the personal loan route, prepare for sticker shock. Unsecured credit generally has a much higher price than secured credit due to the increased risk. Since you’ll likely be applying for a loan in the mid to upper five figures (if not more), be prepared to see APRs of 10% and higher, even with good credit.
Even if you happen to get a reasonable interest rate, watch the repayment term. While RV loans can span 10 years or more, personal loans do not. Many lenders max out personal loan terms at six years (and they charge more for longer loans). Those four years can make a huge difference to your monthly payment. Unless your rent is astronomical, there’s a good chance the personal loan won’t save you much from month to month.
Either way, you’re in a tiny residence
If you’re in it for the long haul, a tiny house can definitely be an affordable option. If you can buy it outright, you can lower your monthly parking and moving costs. If you finance it, you can potentially lower your monthly costs.
Even if you don’t, however, after paying off the loan, you own your home. Then you’re in the same boat as the cash people, with only parking and moving costs to pay. And, as we noted above, that’s more than likely significantly less than rent in almost any market.
However, before you get carried away with calculating how much you’ll save each month, there’s one last thing to consider: tiny homes are tiny. Yes, you can break even after a few years (or 10 or more with a loan), but – are you willing to spend that long on 300 square feet?
In short, the lifestyle is not for everyone.
Once you’ve spent your $30,000 to $150,000 — or, worse, borrowed it – you’re now stuck with a tiny house (and potentially, not-so-little debt). I’m no expert on the tiny home resale market, but something tells me it’s not as vibrant as the regular real estate market. If your current living room is larger than your potential tiny home, think twice before buying.
For many people the best answer is downsize – but not down to a small house. Just moving into a smaller apartment can make a big difference to your budget without completely disrupting your lifestyle. Try running it in a smaller place before moving from three rooms at three hundred square feet.
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