As Mortgage Costs Spike, Is It Time to Look at Purchasing a Tiny Home?

Don't buy a tiny home until you read this.

Tiny homes are typically classified as properties that are 400 square feet or less, although some definitions go up as high as 1,000 square feet. Tiny homes have become a popular option, with an entire tiny house movement, in part because they cost around a fifth or less what traditional properties cost.

Their low price tags may make tiny homes seem even more attractive in this day and age, with mortgage rates soaring and home prices rising rapidly. But if you're considering buying one, there are a few things to think about first. 

Some tiny homes may actually depreciate in value

Some tiny homes are on wheels or lack a physical foundation and are thus considered RVs. Unfortunately, unlike most real property such as residential homes, RVs usually depreciate in value rather than going up in value. And even if your home has a permanent foundation, reselling it can still be difficult because tiny homes are niche products that not everyone wants to live in.  

As a result, if you're counting on a tiny home to help you build wealth by acquiring a valuable asset, you need to be aware this may not happen. 

Getting a mortgage for a tiny house can be tricky 

Generally, mortgage loan lenders have certain requirements for a dwelling, including a physical foundation. Tiny homes may not meet these requirements. Many lenders also have minimum mortgage limits and tiny homes may fall below that amount. As a result, it can be difficult or impossible to finance your tiny home purchase with a traditional mortgage.

You may be able to get an RV loan, or get financing through a tiny home builder. But the rates are likely to be higher than a standard mortgage loan and you typically won't be eligible for the tax benefits a traditional mortgage offers. 

Not all areas allow tiny homes

You'll need to find a place to put your tiny house. Unfortunately, sometimes zoning and building regulations prohibit this type of construction because they have minimum size requirements or other requirements a tiny home cannot meet. 

Not all home insurers cover tiny homes

When you invest in your tiny home, you'll want to protect your investment. Unfortunately, it can sometimes be difficult to find a homeowners insurance policy that will cover a tiny home. You may have a more narrow choice of insurance companies, if you can find coverage at all. 

There are also some benefits to owning a tiny home

While you need to be aware of the potential downsides of tiny home purchases, there are also some upsides as well. 

Tiny homes don't cost much to build, so you may be able to pay out-of-pocket after saving up for a few years. You may be able to avoid property taxes if your tiny home is on wheels and your utility bills are going to be a lot lower than if you had a larger property.  You can also put your tiny home on a smaller plot of land, which means buying a lot may be less expensive. 

If these upsides outweigh the potential downsides, including limited storage space, then you may decide you want to move forward with a tiny home purchase. But don't let high mortgage rates scare you into buying a tiny home if that's not really what you want -- otherwise, you could come to regret your purchase a lot over time. Instead, remember that rates are still relatively affordable by historical standards and they could always go down in the future.