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Should you take out a loan to buy a tiny house or RV? Two financial planners weigh in

The demand for RVs has shot up nearly 40% thanks to work-from-home arrangements amid the coronavirus pandemic. Here's how financial planners say you should pay for one.

Justin Paget | DigitalVision | Getty Images

RV manufacturers have been busy. With many companies sending employees to work from home during the pandemic, more Americans are moving out of crowded cities, abandoning 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 in, say, East Tennessee, for less than what they spend for a studio apartment in Manhattan, many of these big-city drop-outs aren't opting for larger dwellings.

According to a January 2021 report, the RV industry has seen a 39% uptick in shipments, indicating that many are hitting the open road in a home on wheels comparable in size to a (very) small studio apartment. Another popular trend is tiny homes, whether as an affordable guest house for quarantining relatives or primary residence, on land zoned for residential living.

The prices for both RVs and tiny homes vary drastically: "DIY" tiny homes can cost well under $10,000, but luxe versions with stone countertops and high-end finishes can climb to upward of $150,000 with customized add-ons. The average price of a tiny 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 as you would a mortgage? Ahead, we spoke with two financial planners who share their advice for anyone considering a change of scenery.

Andrew Westlin, CFP

New York

Cash, credit or loan? Cash, or finance under certain conditions

There's one important distinction between tiny homes and RVs, according to Betterment financial planner, Andrew Westlin: Tiny homes are a residence and therefore more easily financed with a mortgage. RVs, on the other hand, are a recreational purchase. Personal loans with lenders like LightStream exist for RVs, but the interest rates probably won't be as good as you get with a mortgage.

Cash is, therefore, ideal from a mathematical point of view, since you can avoid interest and other fees that come with borrowing. As with any major purchase, have your debt under control and have an emergency savings in place before you commit.

If you do borrow, the same holds true: "A lot of people are interested in tiny homes because they're trying to get away from larger expenses that are holding them down," Westlin tells CNBC Select, so they might want to be mindful of how much debt they take on.

Mortgaging land and a small house could be financially prudent; just be sure you do your research. Tiny homes have lower utility bills and maintenance costs compared to large homes. And even at $60,000, a tiny home likely has a smaller price tag than full-sized houses in most markets.

But don't forget to factor in the cost of land, as well as other unseen costs like digging a well for water and/or providing power to your property (if you plan to go rural or off-grid).

And like any mortgage, check the interest rates, says Westlin.

"The thing to keep in mind is that under 5% is a general rule of thumb [for mortgages]. Also be sure that you're able to afford your monthly payments."

Jeanne Fisher, CFP

Nashville, Tennessee
Cash, credit or loan? Cash, or finance the land

"Generally speaking, it's perfectly fine to finance your home, whether it's just a mansion or a tiny house," Jeanne Fisher tells CNBC Select. "Property values appreciate over time, and that's primarily because of the land that they're on."

An RV, on the other hand, is a depreciating asset, Fisher warns. Though the RV market is currently experiencing a boom and prices are higher than normal, this trend won't last forever.

"The boating industry is seeing the same thing," Fisher says. "Everybody wants a boat. That's short-term supply and demand, not the long-term appreciation of an asset. This is such an important distinction."

Bottom line

If working from home is giving you the chance to pursue your off-grid lifestyle dreams, you should still plan out your tiny home or RV purchase like you would any major expense.

For an RV purchase, using cash is probably best unless you can get a low-interest personal loan with comparable rates to a mortgage (under 5% APR is ideal). Also keep in mind that RVs come with ongoing costs, such as campground rental rates and maintenance. Plus, their value won't hold up as well as that of a traditional home. Buying a used RV in cash and fixing it up may be an affordable option and spare you the hassle of a long-term monthly payment on a loan.

Tiny homes, especially when you own the land, are likely a better long-term investment than an RV and can save you in utility bills when they're efficiently designed. Some banks and credit unions offer 15- and 30-year tiny home mortgages that tend to offer better APR than RV loans.

Whatever option you choose, think about your future and don't get too caught up in today's trends — particularly if you're using a big portion of your savings or taking out financing to cover the cost. Consider why you want to purchase an alternative home — for recreation? affordability? — and trust that you can always make the leap even after the work-from-home revolution becomes yesterday's news.

Unsure whether to dip into your savings or swipe your credit card to cover your next major purchase? Email reporter Megan DeMatteo at megan.dematteo@nbcuni.com to share your upcoming purchase and question to be part of CNBC Select's new "Cash, credit or loan?" series.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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