Buying a home is one of the most important financial decisions you’ll make in your lifetime. It’s an investment that will grow over time and provide a sense of security, comfort, and stability for years to come.
But with so many different financing options available, how do you know which one to choose? Today we look at rent-to-own vs. mortgage.
We’ll break down each option and see which one may be best for you.
What Does Rent-To-Own Mean and How Does It Work?
A rent-to-own agreement is a type of contract where the renter rents an item with the option to purchase that item. This agreement is often used in real estate, whereby renters rent a property and have the choice to buy it at some point for an agreed-upon price.
Renters sign this kind of lease because they can’t afford or don’t want to commit to buying a house outright.
Keep in mind that rent-to-own involves more than renting. There are two parts to this agreement: rent and equity. The rent part is just like any other rental agreement. You pay the landlord each month for the right to live in the property.
The equity part of the agreement is where you start to build up your ownership stake in the property. You’ll need to save up a certain percentage of the purchase price, which will be held in an escrow account.
Every rent payment (or part of it) you make goes toward your ownership stake and, ultimately, the purchase price of the home.
However, there are two types of contracts under rent-to-own: lease option and lease purchase.
Lease Option: Home Ownership With an Escape Clause
A lease option agreement allows you to rent the home with the right, but not the obligation, to buy it. This is sometimes called “rent-to-buy.” If you choose not to purchase the home, you can simply walk away and rent somewhere else.
Lease Purchase: You’re Locked In
A lease purchase agreement is similar to a mortgage. Once you sign, you’re locked in and can’t back out without penalty. If you do decide to buy the home, the rent payments you’ve made will be applied to the purchase price.
The Pros of Rent-To-Own
There are several benefits to renting to own. Let’s discuss a few here.
Helps You Build Equity
When you rent, your rent payments are deposited into an escrow account that will ultimately be used to pay for the home when it’s time to buy.
Because you’re making monthly rent and equity contributions, over time you’ll build up enough money in this account for a decent down payment on your property. And if the value of the house goes up between now and then, so too will your contribution toward buying it.
This means rent-to-own gives renters more control over their financial future than renting alone does by allowing them to save at least some money each month.
Gives You Time to Get Your Financial House in Order
One of the biggest benefits of rent-to-own is that it gives you time to get your finances in order. It’s not a quick or easy process to buy a home, and if you’re not quite ready yet, rent-to-own can bridge that gap.
You’ll have plenty of time to save up for a down payment, improve your credit score, and figure out what type of mortgage would be best for you.
This way, when it comes time to purchase the home, you’ll be fully prepared financially.
Good for People With Inadequate Credit Score
If your credit score is on the lower side, rent-to-own may be a good option for you. This type of agreement allows you to rent the home and work on improving your credit score at the same time.
Once your credit score is up to par, you can then purchase the home outright or refinance with a traditional mortgage.
The Cons of Rent-To-Own
Of course, rent-to-own isn’t perfect for everyone. Here are some potential drawbacks.
You May Pay More in the End
Since rent-to-own agreements involve more than just renting, you may end up paying more for the property in the long run. This is especially true if you opt for a lease purchase agreement.
While rent-to-own does give you a chance to build equity and save money, it also comes with extra costs like rent that don’t apply when purchasing the home outright or taking out a mortgage loan.
You Lose Flexibility
If your life circumstances change and you need to move, it can be tough to do so when you’re in a rent-to-own agreement. If you want to break the lease, you may have to pay a hefty penalty fee.
This isn’t always the case, but it’s something to keep in mind.
What Is a Mortgage and How Does It Work?
Mortgage loans are a common way to buy a home. The buyer takes out a loan from a bank or other lending institution and uses it to purchase the property.
The loan is paid off over time, usually 30 years, with monthly payments that include both principal and interest. At the end of the loan term, the house belongs to the borrower free and clear.
The Pros of Mortage
There are many benefits to taking out a mortgage loan to buy a home. Let’s discuss a few.
Easy to Finance
Since you’re borrowing money from a bank, it’s simple and straightforward. There are no rent payments or equity contributions involved in the process; all you need is a good credit to qualify for a mortgage loan.
Interest Is Tax-Deductible
Interest paid on mortgage loans is tax-deductible. This means you can save money by deducting your interest payments from your taxable income, lowering the amount of taxes owed each year, and freeing up more funds to pay down your loan balance faster.
The Cons of Mortage Loans
Of course, mortgage loans aren’t a perfect solution for everyone either. Here are some reasons why they might not be the best option.
You’re Committing to a Long-Term Relationship
When you take out a mortgage loan, you’re committing to a long-term relationship with the bank. This means you’ll be paying off your loan for many years, which can be daunting.
You Can Lose Your Home if You Miss Payments
If you miss payments on your mortgage loan, the bank can take your home away from you. This is called “foreclosure,” and it’s a process that can be difficult to reverse.
Rent-To-Own vs. Mortgage: Which Is the Best Option for You?
Ultimately, the best option between rent-to-own vs. mortgage depends on your personal circumstances.
Whatever you decide, remember to do your research and ask lots of questions! Your real estate agent can help walk you through the process and answer any questions you have.
Are you wondering how to buy a home with no credit or bad credit? At Homebuyer Creators, we can help. Contact us today to learn more.