Talk of Tiny House Loans is heating up on the interwebs. A little while ago Thom Stanton of Timber Trails posted this warning about lending scams targeted toward the movement. More recently, Tiny House Lending (which partners with licensed U.S. lenders) expanded their service. All of which begs the question:
If you can get a Tiny House loan, should you? Are Tiny House loans a good idea?
The initial answer is, unfortunately, another question: Compared to what?
Today’s post is going to attempt to break down some of the considerations and complications of the topic. Now mind you, it is not going to be a popular topic and it may lose some r(E)volutionaries. But first, a disclaimer:
I am not a financial advisor. I do not have a degree in economics and I don’t have a horse in this race. Further, I’ve been exceptionally transparent about my own financial history and its effect on my decision to live tiny (or not). Frankly, my personal belief (read: not professional recommendation) is that anyone who can pay cash for a Tiny House should strongly consider doing so as a first option. However, I also see the other side of the fence.
Many would-be Tiny House people pay rent or mortgages, and are trapped in that cycle because both are increasing at a rapid clip (see figures 1 and 4). It’s hard to save for a Tiny House when the majority of your income goes toward paying bills each month. So can I see the wisdom of paying interest on a short-term loan that allows someone to own his/her Tiny House outright in a few years? Yes, in theory. But it’s not always a simple apples-to-apples equation and there’s positively no one-size-fits-all solution. So let’s forgo my opinion, and take a look at the numbers.
COMPARED TO WHAT?
To determine whether Tiny House loans are a good idea, we need something to compare them against.
If you can live for free, forever in some other situation then I’d say a Tiny House loan is a bad idea (duh). But few of us have this luxury. Most of us need to pay a mortgage or rent of some kind. Those of you currently backpacking through Southeast Asia for $18/day, please skip the rest of this article. Stay where you are. And send me pictures.
For the rest of us, here’s my attempt to compare several living alternatives: a standard mortgage, median rent and a mid-tier Tiny House loan. If you want to know how I arrived at some of these values, please see the “Potentially Boring But Very Necessary Detail Section” below.
THE BIG REVEAL
In a vacuum, it appears that even at a higher interest rate (14.65%), the Tiny House (via personal loan) costs you only $49,574 compared to $272,160 for rent or $470,964 in mortgage and interest payments. You might find that for your circumstances, an even higher interest rate on a Tiny House loan still works. If you have good to excellent credit and can get a more favorable rate, the math could be even more compelling.
Conclusion: In some cases, a Tiny House loan can make a lot of financial sense. One prime example: in the calculation above, the monthly payment on the Tiny House loan would be $826 (see below for detail).
$826 (monthly Tiny House loan payment) – $756 (monthly rent payment) = $70/month
If you are currently paying rent, I’ll be you’d be pretty excited about the possibility of paying an extra $70 extra per month toward owning your own Tiny House, which you’d have paid off in five years.
I’ll be the first to admit that there are huge gaps in this quasi-analysis, including several things that are essential, but really hard if not impossible to accurately measure:
- *Parking is a HUGE variable – a potential deal breaker, really. My evaluation points me to conclude that you could/should consider owning land for your Tiny House. Of course, land values vary greatly from urban to suburban to rural locations, so costs could fluctuate wildly. In sum, paying rent for parking your Tiny could very well eat up a lot of the financial upside. For reference, I calculated parking costs based on the monthly lot fee average at Orlando Lakefront Tiny Home & RV Community.
- What’s the estimated asset value of your home once you’ve paid off your 30-year mortgage? Who can say what the market will look like in 30 years? But here’s a fact to consider: to reach break-even on $470,964, your home will need to appreciate by 69.78%. I can’t look at these numbers and think that a traditional home (based on these mortgage assumptions) is a good investment.
- On the contrary, nobody can accurately assess the resale value of a Tiny House. The value is ONLY what someone is willing to pay.
- For that matter, home maintenance can be a big expense on traditional houses, and we can’t really say what the numbers look like for a Tiny.
- You may qualify for a lower or higher interest rate (for either a mortgage or a Tiny House) which could significantly change this sample calculation.
- Your rent payment could increase significantly over the next 30 years.
- A Tiny allows you to take your home with you and/or potentially rent it out for future income.
What are your thoughts? Where do you fall in all of this? Would you take out a loan? Do you feel tiny houses are going the way of “big business” and corporate banking? If so, why? How do we avoid it?
POTENTIALLY BORING BUT NECESSARY DETAIL
Part 1: The Mortgage
Things to know:
- The median U.S. home price as of March, 2015 was $277,400 (see figure 1)
- A down payment could range from 3.5% (FHA) to 5% (Conforming) to 20%.
- For this example I am assuming a 5% down payment, which equals $13,870
- The remaining balance ($263,530) would be mortgaged at 4.076% (rate effective May 15, 2015)
- Monthly payment would equal $1,269.71
- Total principal paid ($263,530) equals 57.65% of total payments (see figure 2)
- Total interest paid ($193,564.31) equals 42.35% of total payments (see figure 3)
- Total home cost accounting for down payment, principal and interest = $484,834
Figure 1: Median Sales Price for U.S. Homes, March 2015
Source: U.S. Bureau of the Census
Figure 2: Total Principal Paid on $263,530 mortgage (30 years) at 4.076%
Source: Bankrate mortgage calculator
Figure 3: Total Interest Paid on $263,530 mortgage (30 years) at 4.076%
Source: Bankrate mortgage calculator
Part 2: Paying Rent
Things to know:
- The median U.S. asking rent for vacant units (3rd quarter 2014) was $756/month (see figure 4)
- The 30 year total would be $272,160
Figure 4: Media Asking Price for Rent (vacant units) 1995-2014
Source: U.S. Census
Part 3: The Tiny House Loan
- The median price for a Tiny House is estimated at $35,000 (subjective average)
- Financing via personal loan. APRs range from 5.99% to 32.99%.
- I am assuming a 14.65% APR offered to someone with average credit (620)
- No down payment is required
- Term = 60 months
- Monthly payment would equal $826.23
- Total principal paid ($35,000) equals 70.6% of total payments (see figure 5)
- Total interest paid ($14,573.87) equals 29.40% of total payments (see figure 6)
- Total Tiny House cost accounting for principal and interest = $49,573.87
Figure 5: Total Principal Paid on $35,000 Tiny House loan (5 years) at 14.65%
Figure 6: Total Interest Paid on $35,000 Tiny House loan (5 years) at 14.65%