The Pros And Cons Of Rent-To-Own Homes

Then a rent-to-own home may be right up your alley. But before you get into such an agreement, you should know its pros and cons.

Renting a home allows you to have a roof over your head without worrying about costly repairs, qualifying for a mortgage, saving for a down payment, etc. But renting also keeps you from being a homeowner and pays your landlord’s mortgage, allowing them to build equity in the property and possibly sell it for a hefty profit in the future.

Buying a home lets you build equity and gives you the pride of being a homeowner. It also gives you the potential for a future financial boost if the property appreciates and you can sell it for more than you bought it. Unfortunately, buying a home isn’t easy, as you’ll need significant savings for a down payment and other costs, plus you’ll need to qualify for a house loan. And once you’re in the house, you’ll run into eventual repairs that can drain your bank account.

As you can see, renting and buying both have pros and cons, as do rent-to-own agreements, which meet somewhere in the middle. Do the pros of rent-to-own agreements outweigh the cons? We’ll tackle that question in a minute. But first, let’s describe what a rent-to-own agreement is.

Rent-To-Own Agreements Explained

You may have come across rent-to-own places that let you pay a small monthly fee to rent a TV or piece of furniture with the option to buy it later on. Rent-to-own homes work similarly, but without exorbitant fees that have you pay much more than the property’s worth.

With rent to own, you rent a property for a few years with the option to buy it once your lease ends. This option isn’t free, though, as you will have to pay higher rent than the fair market value. Why? Because that excess goes towards the eventual down payment on the home.

You may also have to pay an option fee. As its name suggests, this fee gives you the option to buy the home at a later date and technically reserves it for you. The option fee can be anywhere from 1-7 percent of the home’s value, and may also help with the down payment. If you don’t buy the home after your lease ends, you will lose the option fee and the excess rent you paid, as a down payment won’t be necessary since you will be moving on.

The Pros And Cons Of Rent-To-Own Agreements

Should you get into a rent-to-own agreement? You’ll have to weigh these pros and cons before making that decision:

Pros:

• You can see if you like the home as a tenant before committing to buying it.
• You can build up cash towards a down payment as you rent.
• You can spend less on repairs as a tenant than if you owned the home, as they are usually split in rent-to-own agreements.
• You have the option to buy the house or move once your lease is over.

Cons:

• You could lose the excess cash paid on rent and the option fee if you don’t want to stay in the home and buy it.
• If you fail to qualify for a mortgage, you could also lose the excess payments and option fee.