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Tiny House Financing: What's the Best Approach?

Christy Bieber, The Motley Fool

Financing a tiny house can be more complicated than you think. Here are your options and some advice on the best approach to pay for your home.
Image source: Getty Images. 

Small house sitting next to bag of money and jar of coins.

Tiny homes are all the rage, as they promise flexibility and low costs. But while a tiny home may cost less than a regular-size abode, these homes can still come with a hefty price tag. In fact, the average cost for a tiny home could be as much as $30,000 to $40,000.

Most people can't come up with this much cash all at once to purchase the tiny space they'd like to call home, which means financing becomes necessary. Unfortunately, securing a loan to buy a tiny home isn't always easy.

Since the reason most people buy a tiny home is to keep costs lower, it's also important to choose the most affordable financing method. If you're thinking about purchasing a tiny home and you're not sure where to turn for a loan, here are a few of your options -- along with some advice on which one may be best for you.

Mortgage loans

Unfortunately, mortgage loans are often unavailable for tiny homes for one of several reasons.

The amount you need to borrow may be too low for a mortgage lender, for example, or the tiny home may not be built on a traditional permanent foundation, making it ineligible for a mortgage. The home may also be too difficult for a lender to appraise because tiny homes are so unusual.

If you can qualify for a mortgage loan, this source of financing can be a good one. Mortgages typically have lower interest rates than any other loan, and the interest can be tax-deductible if you itemize.

But mortgages are meant to be repaid over 15 to 30 years in most cases, so you're locking yourself into a very long repayment period. Many people opt for the tiny home lifestyle to avoid this type of burden. Sure, you can pay off the mortgage loan early, but if you decide to go this route, you'll need to make sure you have no prepayment penalties -- and you have the discipline to consistently pay more than what's required.

Getting a mortgage is simply not an option in many situations. While it might be nice to enjoy the benefits a mortgage provides, don't count on being able to get one for your tiny home.

Personal loans

Personal loans, on the other hand, are often the best way to finance a tiny home. That's because you can use the proceeds from personal loans for anything you want, so you don't have to worry about your lender not appraising your home for enough or saying your home doesn't qualify.

When you take out a personal loan to finance a tiny home, there's a wide variety of different lenders you can work with, including online lenders, banks, and credit unions. Many personal loan lenders are willing to lend anywhere from $5,000 (or less) to $100,000, so you should be able to borrow the appropriate amount.

Repayment terms are often a reasonable three to five years, although some lenders allow you to stretch personal loan repayment over a decade or more so you can make the payments on your tiny home more affordable.

Personal loans also have a lower interest rate than credit cards in most cases, although their rates are higher than those of mortgages.

Some personal loan lenders, such as LightStream, specifically market "tiny home loans." But you don't have to go with a lender that advertises its product that way. You'll have more choices if you simply shop around among all personal loan lenders that let you use the funds for anything you'd like.

RV loans

RV loans are another potential option for some tiny home owners, though you may run into similar problems as you might with a mortgage lender: RV lenders won't know how to deal with your unique abode.

If you plan to affix your tiny home to a permanent foundation or to use it as a residence, this could disqualify you from getting an RV loan. Even if you can qualify, RV loans often require large down payments -- which you may not have -- or require an appraisal of the RV, which could be difficult with a tiny home.

If you can qualify, an RV loan may have a lower interest rate loan than a personal loan because it will be secured by the home. In other words, if you fail to make your payments, the lender can repossess the home in order to recover its money, and in return for that insurance, the lender will offer a lower interest rate. But most borrowers won't be able to take advantage of this -- and you'll have to jump through a lot more hoops than you would to get a personal loan.

Credit cards

Putting your tiny home on a credit card is another possible option some homeowners consider, but there are a number of problems with this course.

Many credit card issuers offer a lower credit limit than the amount of money you'd need to build or buy your tiny home. Even if you can get enough credit, the interest rate will likely be much higher than the rate you'd pay on a personal loan. Plus, since there's no fixed repayment period, you'd have a lot of uncertainty about when your home would actually be paid off.

If you can qualify for a 0% APR credit card, you could eliminate the problem of the high credit card interest rate -- but only temporarily. These 0% APR promotional offers usually expire about 12 to 15 months after you've opened the card. Chances are good you won't be able to pay off your tiny home in full by this time. So you'd be stuck hoping you could move the remaining balance to a balance transfer card with a 0% promotional rate -- and there's no guarantee this would be possible -- or paying interest on the remaining balance due at a much higher rate.

Because of these downsides, paying for a tiny home with a credit card is usually a very bad idea.

What's the best approach for tiny home financing?

As you can see, both an RV loan and a mortgage loan provide some benefits in the form of lower interest rates and, in the case of a mortgage loan, a potential tax deduction for interest. Unfortunately, both RV loans and mortgage loans aren't an option for many tiny home buyers, because tiny homes don't fit lenders' expectations for either traditional RVs or traditional homes.

Personal loans don't present this obstacle, as lenders allow you to do anything you want with the money. And you'll usually pay far less interest with a personal loan than with a credit card. If a tiny home purchase is in your future, you should strongly consider shopping around among personal loan lenders to find out about loan rates and terms.

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