When Kerri Fivecoat-Campbell and her husband moved from Kansas City to a 480-square-foot lake house in Northwest, Ark., they'd planned to build a larger house on the same property and use the existing house as an office and guesthouse.

Yet the recession convinced the couple to stick with the house they had and build another small space as an office and guesthouse. Fivecoat-Campbell says they're happy with a smaller footprint. "We live in an area where recreation is a big thing," she adds. "We like to be outdoors and spend time with the dogs and not have to maintain a big house. It's easier to take care of."

[See 10 Signs American Families Are Falling Behind.]

The constant upkeep and high expense of McMansions have made smaller homes appealing to many Americans. "People realize now if they live in a tiny house, they have more money left over to pay for other things," says Derek Diedricksen, a maker of small houses in Stoughton, Mass., and author of Humble Homes, Simple Shacks, Cozy Cottages, Ramshackle Retreats, Funky Forts: And Whatever the Heck Else We Could Squeeze in Here.

Costs for tiny homes can vary depending on factors like the materials and complexity of the design. "There are people who've gone out and built a modest house for $5,000 to $10,000 using Craigslist or free materials, but there are some that are more high-end, like rustic cabins," says Diedricksen.

Margaret Webster, who moved into a 12 x 16 foot house on Echo Valley Farm outside Ontario, Wisc., a few years ago, says she paid close to $40,000 for the house, which includes solar panels, a wood stove, a wind turbine, and a water tank. "It costs more now," adds the retiree.

Some tiny house-dwellers who DIY their homes wind up paying much less. Sage Radachowsky, who lives in Boston in a 120-square foot house he built atop a car trailer, says the materials for his house cost around $3,000. (He rents a driveway to park it, but says the driveway costs less than a typical small room in Boston.)

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Here's a look at why these tiny home-dwellers chose to downsize and how they made the transition:

Low (or no) mortgage. Webster and Radachowsky have no mortgage on their homes, which can be freeing both financially and personally. "My life is less expensive, which gives me more time to enjoy it," says Radachowsky, who goes hiking, writes songs, build guitars, and grows food in a small garden.

Fivecoat-Campbell took out a mortgage, but she says it might be preferable to go mortgage-free on a smaller home. Back when she and her husband owned two homes, they were on a balloon payment for the lake house and worried that an interest rate hike might price them out of the house. They spent eight months searching for a bank that would allow them to refinance. "[Companies] couldn't find anything comparable to the house," she says. "There are small houses and trailers but nothing like our house. That's where we ran into trouble refinancing, but we did find a local bank that would refinance us."

Lower utility costs. Tiny house-dwellers have several options for utilities. If building codes allow it, Diedrickson says they can install electricity and plumbing as they would in a regular house, but that's generally more expensive than going off the grid. "The majority of the world still uses outhouses," he points out. "There are different toilets on the market, like composting toilets, that in essence turn your waste into ash or usable compost, so you can bypass having to have a septic system at all."

[See Why You Pay Extra to Live in the City.]

Tiny house-dwellers who are eco-conscious appreciate not just the lower utility costs but the smaller environmental impact. Radachowsky harvests electricity from a solar panel and says he pays around $20 a month for propane to heat the house during the coldest months. Webster, meanwhile, has no connections to public utilities except for a telephone (so she can stay in touch with family). She uses a composting toilet and washes in a bucket. "I grew up washing in a bucket," she explains, "but sometimes I wash my hair next door because it's easier."

Still, utilities for tiny houses can create complications. Fivecoat-Campbell opted to dig a well, which "went deeper than we'd ever imagined," running up the cost since the company charged by the foot. However, she's happy with the lower cooling costs in the summer.

Less clutter. A smaller living space pushes the homeowners to cut down on their possessions, but that means they have fewer belongings to maintain and spend less time searching for lost items. "It's amazing, we just don't need all that room or that much stuff," says Webster, who's previously lived on a sailboat and says her next project is converting a car to electric.

Initially, Radachowsky stored some of his belongings in a basement. "I'm still winnowing my belongings down, but that is a liberating process," he says.

Unlike a McMansion with endless rooms to fill, a small house acts as a deterrent for buying more stuff. "In a small house, everything has to be functional," says Fivecoat-Campbell, who videotaped some of her belongings, such as her mother's dining room set and an antique spinning wheel, before cleaning house. "I'll always have the memories, I just won't have to store the stuff," she says.

[See 10 Costs Homeowners Insurance Doesn't Always Cover.]

Diedricksen points out that tiny houses aren't new, but they make a lot of sense financially: "Growing up, most of my friends' parents were never around to enjoy their big houses because they were working to pay for them."





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