Renting or buying a tiny home: which is cheaper?
Renting is expensive. But during own A house can be more affordable, purchase A house is not cheap. (And it even begs the question of whether owning a home is actually less expensive — but that’s another article.)
One way some people are getting around the housing problem is by downsizing—even down to a tiny house.
Typically measuring 500 square feet or less, small homes have grown in popularity over the past decade. These tiny apartments can have price tags lower than a new car, making the budget far more affordable than even a bargain apartment. Most even come with wheels, making moving around a breeze.
But is a tiny home really the solution to your housing problems? As with most other things in this country, it depends on how much money you can throw into the problem.
If you have the money, it’s simple math
For many people who are growing up, buying a tiny home means having to pay a specialist contractor a lump sum in cash for a custom build. If you follow this path, you will completely own your home. This means no more monthly rent or mortgage payments on the home itself.
However, as mentioned above, most small houses have wheels, not foundations. So you have to park it somewhere. Some prefer to buy a cheap property and park on their own property. Others can park for free on a corner of a larger lot owned by friends or family. And still others choose to park at RV parks, either settle into one forever, or travel from park to park.
The costs can vary greatly depending on the route. But even at the higher end, your monthly cost of parking a small home will likely be significantly less than paying rent for an apartment or house in the same area. (However, if you move your small home frequently, it may add some additional costs.)
Of course, if you don’t have the money to buy a tiny house worth $30,000 to $150,000, the math gets a lot more complicated.
The problem with financing tiny houses
Put simply, financing a tiny home is difficult. The typical tiny home is actually classified as a mobile home and not a house. So unless it has a regular basis – which most don’t have – you just can’t get a mortgage loan on 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 not many banks offer RV loans. Alternatively you could try getting a personal loan as they are much easier to find but this has its own problems.
In terms of cost, an RV loan will almost always be the cheaper option of the two. Because RV loans are collateralized – meaning your RV (or small house in this case) serves as collateral – they can have much lower interest rates than unsecured personal loans. If you have good credit, you can find RV loans with rates similar to regular car loans.
Your monthly payment depends on your credit conditions. Some lenders offer a maximum term of 10 years for RV loans, while others offer terms of up to 20 years. The shorter your loan, the higher your monthly payment – but the less interest you pay over the life of your loan.
Whether your monthly rate is less than the rent in this situation depends heavily on the details of your loan. (And you still have to add the cost of parking your tiny house, plus any associated moving expenses for the move.)
If you decide to go down the personal loan route, be prepared for sticker shock. Unsecured loans usually have a much higher price than secured loans due to the increased risk. Since you’re likely to be asking for a loan in the mid to high five-figure range (if not more), you should expect an APR of 10% or more, even with good credit.
Even if you get a reasonable interest rate, pay attention to the repayment period. While RV loans can be extended for 10 years or more, personal loans do not. Many lenders limit personal loan terms to a maximum of six years (and they charge more for longer loans). Those four years can make a big difference to your monthly payment. Unless your rent is astronomical, chances are you won’t save much monthly with the personal loan.
No matter what, you’re in one tiny hometown
If you’re in it for the long haul, a tiny home can certainly be an affordable option. If you can buy it outright, you can lower your monthly costs on parking and moving fees. If you fund it, you might be able to lower your monthly expenses.
Even if you don’t, you own your home after you pay off the loan. Then you are in the same boat as the cash people and only have to pay parking and moving fees. And as we noted above, this is most likely a lot less than rent in almost any market.
However, before you get carried away with the math of how much you’re saving 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 3,000 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 possibly not-so-small debt). I’m no expert on the small home resale market, but something tells me it’s not quite as volatile as the regular housing market. If your current living room is larger than your potential tiny home, think twice before you buy it.
For many people the best answer is to downsize – just not down to a tiny house. Simply moving to a smaller apartment can significantly improve your budget without completely turning your lifestyle upside down. Try to get it working in a smaller location before heading out three bedrooms to three hundred square meters.
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