Rent to Own Homes vs. Mortgage: How Do They Work?

If you’re hoping to achieve your dreams of homeownership, rent-to-own and mortgage are two options to consider. Here is everything you need to know about these unique approaches to home ownership.

Have you decided to be a homeowner? The first step is to determine whether you are qualified for the mortgage. However, if your credit score is low or you have not saved enough money for the down payment and closing costs, it may be difficult to purchase a home regularly.

In this case, an alternative option would be a rent-to-own home where you rent a house for a certain period of time with the option of buying it in the future. Weighing the pros and cons of rent-to-own homes versus mortgages will help you decide the best course of action.

Rent to Own Homes

Rent-to-own homes allow you to rent the house you intend to buy for a specific period of time. The rental payments contribute to the purchase of the house. There are two types of rent-to-own contracts:

• Lease option agreements that give the option to buy the house at the end of the lease.
• Lease purchase contracts that obligate you to buy the home.

If you are considering the option of renting to own homes, be sure to consult a real estate lawyer who will review the contract and advise you accordingly. In addition, enlist a professional to inspect the home just like in the traditional home purchase in order to look for any major defects.

Pros:

• You get to live in your dream house without having to pay costly mortgage fees. This is because most rent-to-own sellers accept lower credit compared to mortgage lenders.
• You get to test-drive the home and the neighborhood to determine whether you like it before purchasing. If not satisfied, you can always opt out before the lease ends. This helps to eliminate buyer’s remorse.
• There is a pre-agreed purchase price of the home. Even though it is higher than the current market value, the purchase price does not rise. This gives you peace of mind even in a rising market.
• Your equity grows as you continue to pay the rental installments. As a result, you have time to improve your credit score.
• It enables you to accumulate long-term wealth. There is reduced stress of moving as you get settled in the rented house.

Cons:

• You are required to pay non-refundable upfront fees and monthly rent payments.
• There is potential foreclosure if the homeowners forfeit the mortgage payments.
• The purchase price is higher than the current market value. In addition, rent is higher than the traditional way of renting.
• You have to cater for maintenance and repairs.
• You are at a disadvantage when the market prices go down as the purchase price is fixed.

Mortgages

If you’re looking to buy a home but don’t have all the cash upfront, a mortgage is a viable option. A mortgage is a home financing loan that allows you to buy a home now and pay it off over time with regular repayments. When applying for the mortgage, the lender requires the borrower to meet the minimum eligibility criteria, including a good credit score and consistent income.

The home acts as collateral to the mortgage such that if you forfeit the mortgage repayments, you lose the house. The most popular types of mortgages available to borrowers include:

• Fixed-rate mortgages whose interest rate remains constant for the entire loan term.
• Adjustable-rate mortgages whose interest rate changes periodically based on the prevailing market rates.

Although purchasing a home is seemingly the right option, it has its upsides and downsides. Here are some of the arguments for the mortgage option:

Pros:

• Longer-term mortgages are becoming increasingly available, making it an easier option for homeownership.
• Mortgage interest, as well as real estate taxes, are deductible, which reduces your taxable income.
• Paying mortgages are a way to build your investment potential over time.
• The government has introduced programs such as federally-backed mortgages and tax breaks to encourage entrance into the real estate market for first-time homebuyers.

Cons:

• If you don’t keep up with the mortgage repayments, you could potentially lose your home.
• Mortgage interest rates are continually changing, and can drastically increase.
• The overall mortgage payment over the years is high.
• In addition to interest, there are various other fees associated with mortgages. These include underwriting costs and remortgaging fees.
• The value of your home may decrease as the market fluctuates.

In a nutshell, you should do enough due diligence to determine which option best suits your needs and current financial situation.