Homebuying: How Does Rent To Own Work?
If you want to become a homeowner, you may have recently heard about rent-to-own agreements. How do they work?
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We’ll break it down so you can decide if a rent-to-own home is right for you.
Renting and buying have their pros and cons. The problem with renting is that it doesn’t allow you to build equity in the property where you’re residing and won’t do much for your financial future. It can also make it seem like you’re years away from ever becoming a homeowner. Buying a home, meanwhile, takes a lot of cash, as you’ll need money to cover a hefty down payment, closing costs, eventual repairs, etc.
Does a housing situation exist where you get the best of both worlds? Yes, and it’s called a rent-to-own home. But as with renting and buying, it’s not perfect either.
How Does A Rent-To-Own Home Work?
As you can decipher from its name, a rent-to-own home is a housing agreement that lets you buy a property after renting it for a few years.
When you sign a rent-to-own contract, you agree to pay a monthly rent that exceeds fair market value. This excess rent will accumulate and can be used later as a down payment for the home once your lease ends. Depending on the type of rent-to-own agreement you choose, you may have to pay an option fee. This usually equals 1-7 percent of the house’s value, and it’s a charge that lets you reserve the home while renting so you can buy it later on, while also helping with the down payment. If you decide to move elsewhere once your lease ends and don’t buy the home, you will lose those excess payments to the landlord.
The Good And Bad Of Rent-To-Own Homes
If renting a home to eventually own it sounds like a good deal so far, keep reading because, as with most things, rent-to-own agreements have their good and bad.
What are some ways in which a rent-to-own agreement could benefit you? First, by paying excess rent, you can slowly save towards a down payment on the home. Second, you can give the property a test drive to see if you like it before making a purchase. This may be one of the biggest benefits of rent-to-own homes, as people often encounter surprise issues that make them want to move.
Third, you can save cash on costly repairs to the property. Many rent-to-own contracts split repairs between tenants and landlords. For instance, the landlord may agree to cover significant repairs, while you may pay for smaller ones. Lastly, rent-to-own agreements give you options instead of locking you into a contract you don’t desire. Once your lease is over, you can buy the home or move elsewhere. If you choose to buy it, you’ll go through the standard mortgage process and use your accrued down payment to pay the lender.
As for the disadvantages of rent-to-own homes, you may lose your excess rent payments if you don’t want to buy the house. That excess cash would stay with the landlord, along with the option fee if it was included in the agreement.
Also, if you can’t qualify for a mortgage once your lease ends, you will not be able to buy the home. The landlord will have the option to rent or sell it to someone else, and you’ll not only lose your place in the property, but you’ll also lose those excess rent payments and the option fee.