Should you finance an RV or a cottage?
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RV makers have been busy. With many companies sending employees to work from home during the pandemic, more Americans are leaving crowded cities, ditching cramped offices and apartments for big skies, open meadows and more affordable real estate.
The housing market will be changed, potentially for years to come. But while a New Yorker might be able to buy a single-family home, say in eastern Tennessee, for less than what he spends on a studio in Manhattan, many of these big-city dropouts don’t do not opt for larger homes. .
According to a January 2021 report, the RV industry saw a 39% increase in shipments, indicating that many are hitting the road in a house on wheels comparable in size to a (very) small studio. Another popular trend is small homes, whether as an affordable guesthouse for quarantined parents or as a primary residence, on land zoned for residential living.
Prices for RVs and cottages vary widely: “DIY” tiny homes can cost well under $ 10,000, but luxury versions with stone counters and high-end finishes can go up to $ 150,000 with custom add-ons. The average price of a small home, according to Rocket Homes, is between $ 30,000 and $ 60,000. Meanwhile, RV price tags range from $ 35,000 to $ 300,000.
So should you finance these alternative homes like you would a mortgage? Previously, we spoke with two financial planners who share their tips for anyone considering a change of scenery.
Andrew Westlin, CFP
Cash, credit or loan? Cash or financing under certain conditions
According to Andrew Westlin, Betterment’s financial planner, there’s an important distinction between tiny homes and RVs: Tiny homes are a residence and therefore more easily financed by a mortgage. Recreational vehicles, on the other hand, are a recreational purchase. Personal loans with lenders like LightStream exist for recreational vehicles, but the interest rates are unlikely to be as good as those obtained with a mortgage.
Cash is therefore ideal from a mathematical point of view, as you can avoid the interest and other fees associated with borrowing. As with any major purchase, get your debt under control and plan for emergency savings before committing.
If you borrow, the same goes: “A lot of people are interested in small homes because they’re trying to get away from the bigger expenses that hold them back,” Westlin told CNBC Select, so they might want to. be careful. the amount of debt they incur.
Mortgaging a piece of land and a small house might be financially prudent; just be sure to do your research. Small homes have lower utility bills and maintenance costs than larger homes. And even at $ 60,000, a tiny home is probably priced lower than full-sized homes in most markets.
But don’t forget to factor in the cost of the land, as well as other unseen costs like digging a well for water and / or providing electricity to your property (if you are planning to move in in rural or off-grid areas).
And like any mortgage, check interest rates, says Westlin.
“What to keep in mind is that less than 5% is a general rule [for mortgages]. Also make sure that you are able to afford your monthly installments. “
Jeanne Fisher, CFP
Cash, credit or loan? Cash in or finance the land
“Generally speaking, it’s perfectly fine to finance your home, whether it’s just a mansion or a small house,” Jeanne Fisher told CNBC Select. “The value of properties appreciates over time, and this is mainly because of the land on which they are located.”
A motor home, on the other hand, is a depreciating asset, Fisher warns. Although the RV market is currently booming and prices are higher than normal, this trend will not last forever.
“The boating industry sees the same thing,” says Fisher. “Everyone wants a boat. It’s short-term supply and demand, not the long-term appreciation of an asset. That’s such an important distinction.”
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At the end of the line
If working from home gives you the chance to pursue your off-grid lifestyle dreams, you should always plan to purchase your small home or RV as you would any large expense.
For an RV purchase, it’s probably best to use cash, unless you can get a low-interest personal loan with rates comparable to a mortgage (an APR of less than 5% is ideal). Also, keep in mind that there are ongoing costs associated with recreational vehicles, such as rental rates and campground maintenance. In addition, their value will not hold up as well as that of a traditional house. Buying a used RV for cash and repairing it can be an affordable option and save you the hassle of a long-term monthly loan payment.
Small homes, especially when you own the land, are probably a better long-term investment than an RV and can save you on utility bills when designed effectively. Some banks and credit unions offer tiny 15 and 30 year mortgages which tend to offer a better APR than RV loans.
Whichever option you choose, think about your future and don’t get too carried away by today’s trends, especially if you are using up a large portion of your savings or taking out financing to cover. the costs. Ask yourself why you want to buy an alternative home – for recreation? affordability? – and trust that you can still take the leap even after the work from home revolution became the news yesterday.
Confused about whether to dip into your savings or swipe your credit card to cover your next big purchase? Email reporter Megan DeMatteo at [email protected] to share your next purchase and your question to be part of the new “Cash, Credit or Loan?” by CNBC Select? series.
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Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.