Should You Finance a Tiny Home With a Credit Card?

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While homebuyers of the early 2000s seemed to want enormous starter castles with every amenity imaginable, the last few years have brought on a renaissance in home building. Simplistic, efficient homes are becoming more popular as homeowners realize they need less space and want less responsibility.

Some homeowners have even taken their quest for less to the extreme by buying or building "tiny homes," or homes with less than 500 square feet of living space. Not only do these tiny dwellings offer less maintenance and upkeep for the homeowner, but they can make your life simpler, too.

Tiny home costs

The Tiny Life founder, Ryan Mitchell, says that, in addition to the simplicity aspect, tiny homes come with financial benefits that are hard to deny. Mitchell says that he's been in his tiny home for almost five years and pays only $15 per month in utilities. His "all in" cost of living is around $575 per month, including food, gas, insurance, phone, and other living expenses.

Of course, part of the allure of tiny homes is the fairly low upfront cost. According to The Tiny Life, building a tiny home with raw materials can cost as little as $23,000. Prebuilt or used tiny homes run the gamut from $5,000 to up to $75,000, on average, but they still cost considerably less than the national median home value of $218,000.

Financing options

The relatively low cost of tiny home living opens the door to a world of possibilities when it comes to financing, but the type of loan you'll need depends on the tiny home you buy. (See also: 9 Things to Consider Before Retiring to a Tiny Home or RV)

Mortgage

According to Fred Glick, CEO of U.S. Loans Mortgage Inc., homeowners who want to buy a small home that is permanently affixed to a foundation and sold with a lot will need to apply for a traditional mortgage for their tiny home unless they have the cash to pay for it outright. The mortgage application and closing processes would be exactly the same as if they were buying any other home in this case, with the only difference being the size of the home.

One big benefit of this strategy is that, with a traditional mortgage, tiny home dwellers may be able to qualify for a lower interest rate than they could get with other financial products.

Personal loan

Personal loans are also popular when it comes to financing tiny homes. Since most personal loans are usually available in amounts up to $35,000, they are often enough to cover the cost of a tiny home altogether. And since personal loans come with fixed interest rates, fixed monthly payments, and a fixed repayment schedule, these loans can mimic a traditional fixed rate mortgage. However, interest rates are often higher on personal loans since they are unsecured.

Cash

Mitchell says that many people also choose to build in stages and save up to pay in cash as they go. This way, they pay for their tiny home over a period of time and finish the project debt-free. This is exactly what Mitchell did when he built his own tiny home for around $35,000. Once he moved in, he says he was able to recoup the amount of money he had been paying in rent in less than two years.

RV loan

Another option to consider is an RV loan, says Brian B. Simmons, CEO of Ask a Lender. Since many tiny homes are on wheels, an RV loan for recreational vehicles is an obvious choice. Simmons notes that not all lenders offer RV loans, and that even those that do may not extend a loan to a tiny home. Still, you can always ask your bank or credit union.

Tiny home loan

There are also a handful of online lenders that offer loans specifically for tiny homes, including LightStream. LightStream claims to offer low interest, fixed-rate loans with no fees and repayment terms of 24 to 84 months for applicants with excellent credit.

What about paying with a credit card?

While there are several financing methods for tiny homes, Mitchell notes that some consumers who build or buy a tiny home seek out credit cards that offer 0% APR on purchases — at least for a limited time. With a card that offers zero interest, you may be able to pay for a tiny home to be built without any interest for 12 months or longer. If you can space your payments out and pay off your tiny home within the card's introductory offer period, you could cover the costs of a tiny home without any interest at all.

Some homeowners may also opt to pay for their tiny home with a rewards card that doles out cash-back or travel rewards. The rewards these cards offer provide a big incentive to use credit as payment, but there are risks that come with using this payment method, too.

Risks of financing with a credit card

One of the biggest downsides to using a credit card to pay for a tiny home is the very obvious potential for debt. Mitchell says that the majority of people who opt to live in a tiny home don't want debt in their lives, so using a credit card might work against their goals, unless they had a very specific plan to pay it off.

Since the average credit card interest rate is now around 17%, you'll also pay a lot of interest if you finance a tiny home with a regular credit card and pay it off over time.

Another downside of using a credit card is that, due to the sticker price of tiny homes, charging one to a card could hurt your credit. Barry Paperno, the former consumer affairs manager for FICO and the blogger behind Speaking of Credit, says that how much you charge to your credit cards is important — even if you have the credit limits available to cover the cost of a tiny home or any other large purchase. Since your credit utilization makes up 30% of your FICO score, charging a large sum can skew your utilization and cause your score to plummet.

This may not seem fair, but that's just how it works. Imagine you have a single credit card with a credit limit of $30,000 and you charge a tiny home with a purchase price of $27,000. Practically overnight, your credit utilization would go from 0% (provided you had no other debts) to 90%. With your utilization determining so much of your score, this is practically credit suicide.

Paperno says that you should strive to keep your credit utilization between 1% and 10% if you want to keep your credit score in tiptop shape. Anything more than that can hurt your score and your chances at getting a loan with the best interest rate and terms.

If you're entirely debt-free and only need to finance a tiny home, however, you may not care too much about your credit score in the short-term. Charging your tiny home to a credit card can make sense, but it's still smart to stay informed and understand the consequences.

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