Podcast #41 - Are You Ready for a Big Move Into the Tiny House Movement?

Updated: Jun 11, 2021

-What classifies as a tiny house?

-How much does it cost for a tiny house versus a mortgage or renting?

-Finding a contractor to build a tiny home and the warning signs to look out for?

-How do I determine if a tiny house is right for me?

In this week’s topic we are going to cover a big movement in tiny house living. What is a tiny house?

According to the International Residential Code, a tiny house is defined as a dwelling unit with a maximum 400 square feet of floor area, excluding lofts.

The Cost for a Tiny House

The average cost to build your own tiny home is a mere $23,000.

The median cost for a tiny house in the US is $59,884.

The expected time to build a house is three to four months.

According to Zillow, the median home price for a currently-listed home in the US is $257,990, while the median sold price is $228,200.

We do know that this can vary. In California the median value is $469,300 and Ohio comes in at $122,400.

The cool thing is being that tiny homes are less expensive, many people can afford to upgrade to high-end finishings and furnishings over and above the $60,000 average.

Naturally, the next question is . . . what about obtaining financing?

So, this can be challenging. It is common that lenders want a minimum of $50,000 to provide a mortgage, and that makes sense because lenders need investments to be large enough to make some money when they factor the cost to close a loan and make money throughout the loan term.

The other factor is that lenders typically want the house to be a permanent fixture meaning the house needs a foundation rather than being on wheels. Hence, that would make any mobile home.

According to NerdWallet, referencing Ryan Mitchell, founder of The Tiny Life blog, 68% of tiny homeowners have no mortgage, compared with more than 29% of all U.S. homeowners.

Financing for a Tiny House

One option for financing is to obtain a personal or unsecured loan from a bank, online lender or credit union.

However, here’s a point of note; when paying loans of this type, the term is typically shorter than a standard mortgage and the interest rates more than likely start in the 6% range and transcend upward depending on your credit score. As a point of reference, today's interest rates for a 30-year mortgage are around 3%. This is an important piece of information when it comes to managing your personal finances.

So why don't we look at a few scenarios.

So let's assume that we have a person who is looking to mortgage a tricked-out tiny home for $80,000.

Right off the bat this is where having a good credit score comes into play as we talked about in Podcast #39 last week. The higher the credit score you achieve, the most favorable rates that you'll receive.

Assuming someone has a 730 credit score which is considered as “good,” chooses a personal loan at an interest rate 6% for 20 years, the monthly payment comes to $1,069.

Okay. If we take the mortgage route, when taking the average 30-year loan with an interest rate at 3%, this means that the mortgage payment would be $833 a month.

The Tiny House Trend

So as we know, most people choose tiny homes to downsize or or they may be looking for an alternative for their first home or they may want to have value in a property or asset rather than paying rent.

So let's take a look at that. According to Statisa, in February 2020, the average monthly rent for an apartment in the United States was $1,468.

In addition, this has been trending upward since 2016 when the average rate was $1,348. It seems logical because many people out there in the middle class are being priced out of homes today whether it be existing structures or new home builds. Hence, renting rates have risen significantly.

In fact, when we list our second home there are six offers on the table within an hour and the rent payments can be much higher than the national average to mortgage a home.

Hence, there is a growing market for tiny home rentals. People simply see it as an exciting way to try something new.

Average Cost for Owning a Tradional Home Vs. a Tiny House

According to the Census, the median amount that American’s spend on their mortgage is $1,556 in 2018. Plus that doesn't factor in taxes or homeowner's insurance and anything else that may come with the house payment such as PMI.

All right let's break this down

-Average rent is: $1,460

-Median mortgage payment $1,556

-The personal loan in our example came out to $1,069 a month

-Mortgaging a tiny home in our sample came out to $833 a month