Would you trade in your home for a tiny house? Downsizing to a micro-living space is the latest trend in housing, and in large part stems from growing environmental and financial concerns, along with the desire to pursue a more minimalist lifestyle in today’s busy world. Still, while tiny houses might have more appeal than traditional homes in terms of affordability, these homes still have their own set of challenges. The process of applying for tiny home financing is complicated and still evolving to catch up with market trends.
Many traditional home loans aren’t compatible with tiny house financing. If you’re thinking about making a major lifestyle switch from a large home to a tiny home, you’ll need to know which forms of financing can be used as tiny house loans and how to get it.
Average cost of a tiny house
Part of the appeal of tiny houses is that they often cost much less than a traditional home. The median cost of a newly constructed single-family home is about $270,000, but a tiny house can cost as little as $8,000 and as much as $150,000. The price of a tiny home depends on its size, the materials and upgrades, and whether the labor is done yourself or professionals. In this sense, building a tiny home gives you much more control over the final price tag because a lot of the work can be done on your own if you’re handy.
Still, the price difference is due to sacrificing a lot of the conveniences that come with larger homes. Tiny homes typically range between 100 and 400 square feet, while the average single family home is 2,520 square feet. Most tiny houses cost between $300 to $400 per square foot, and by contrast, single family homes are on average $150 per square foot. If you’re looking at things from a per-square-foot perspective, a tiny house will be more than twice as expensive as a traditional home.
Tiny home financing options
Many tiny houses cost significantly less than a single family home, so traditional home ownership loans might not always be the best option for financing a tiny house. Luckily, there are other options for tiny home loans, including:
Personal loans for tiny home
Personal loans are the most flexible tiny house loans available. They can be taken out in just about any amount, from $1,000 to $100,000, and can be used for nearly anything. Personal loans are generally unsecured, too, which means you won’t lose your dwelling if you aren’t able to make payments on your loan.
However, you’ll need a stellar credit score to get a good rate on a personal loan when financing a tiny house. Interest rates on personal loans can range from 5% to 36%, so if your credit history has a few blemishes, you might be better off choosing a secured loan with a lower interest rate.
Home equity loans
If you already own a home and have built up equity, certain types of tiny home financing can be done through a home equity loan. As a prerequisite, you’ll need to have enough equity built up into your home to borrow against. Lenders often enforce minimum loan amounts, so using your equity to relocate to a low budget micro-dwelling might not be the best use of a home equity loan. If you’re adding a tiny home to the property as a guest house or in-law suite, however, this could be the loan for you. Adding a tiny home on your property will likely add value to your home’s sale price, so you’ll eventually recoup on your investment when it comes time to put it on the market.
Home equity line of credit
Home equity lines of credit are similar to home equity loans. Both are secured against your home and are funded by the equity in the property. The difference is that HELOCs work like a credit card, allowing you access to a line of credit with a set limit that you can withdraw funds from as needed. HELOCs are an ideal option for DIY tiny home financing because you can withdraw small amounts to fund each step of the build, taking only what you need when you need it. This reduces the amount you need to pay back and will help keep your interest payments to a minimum. Keep in mind, though, that a HELOC is secured against your home, so if you don’t pay it back, you risk losing your home.
In most cases tiny homes won’t qualify for mortgage loans, but if the blueprints meet all your bank’s prerequisites for a home mortgage, it could be a tiny house financing option. In general, though, a home needs to sit on a foundation and be a minimum square footage to qualify, but it’s still worth a phone call to your bank to ask.
Anyone who’s traveled in an RV knows that they’re basically tiny homes on wheels. In fact, some mobile tiny homes may meet all the standards to be classified as an RV, which would qualify them for an RV loan. The main issue with that, though, is that you generally can’t get an RV loan if it’s intended to be your primary dwelling. If you’re financing a tiny house to live in part time, however, this could be the loan for you.
Tiny home considerations
Tiny homes may be a good fit for some homeowners, but there are some unique considerations you should take into account before buying one, including:
- Depreciation vs. appreciation. Most homeowners expect their home to appreciate over time, which will hopefully fetch a higher price at resale. This hasn’t been the case with tiny homes, however. In fact, your tiny house could depreciate in value, similar to a car or RV. If you intend to sell your micro unit a few years after buying it, you could end up taking a hit on the home price. You could also end up owing more on the remainder of the loan than you get from the sale, which would put you underwater on your loan.
- Zoning laws. If you’re planning on buying a tiny home, you should look carefully into local zoning laws, including square footage limitations, construction codes and any permits you might need to apply for prior to starting your build. These can all add a considerable cost to your project and should be considered into the total cost before financing a tiny house.
The bottom line
If the minimalist lifestyle is calling your name, there are many different tiny home financing options at your disposal. Spend plenty of time reviewing the numbers before you decide whether to build the tiny home of your dreams. Hidden costs can drive up the price and make it difficult to pay off your loans without going underwater on them, which might deter lenders from letting you borrow in the first place.