You’ve probably heard the term “rent-to-own” used with consumer products like furniture or cars, but it can apply to homes, too. If you’re a renter and have your sights set on buying a house down the road, a rent-to-own agreement is one path to get there. Here are the benefits and drawbacks:
Rent-to-own, otherwise known as a lease purchase, is a legal contract between a buyer (you) and a seller to purchase a house with a future closing date, usually one to three years after the contract is signed. This is different from a lease option, where you’re given the choice to buy the place you were renting — before the home goes on the market — but are under no contractual obligation to do so.
In a rent-to-own agreement, you will pay a deposit fee (usually around $5,000) plus rent and “rent premiums.” Your rent payments will go toward the seller’s mortgage, and the premium payments eventually become your down payment when it’s time to buy the home from the seller.
This kind of arrangement might work for you for a few reasons. The first, and most likely, is it gives you time if you don’t have enough cash for a down payment, which can be as little as 3.5% or as much as 20% of a home’s sale price. Renting to own lets you get the house you want while letting you save up the down payment and closing fees involved in a purchase.
Also, getting the agreement in writing now means you lock in the purchase price at today’s value, rather than gambling on whether it will go up or down while you save a down payment.
There’s also something to be said for having part of your monthly payment benefiting you instead of only paying your landlord’s mortgage, as you’d be doing in a traditional rental agreement. For example, if your premium fee is $500 a month, after a year that would amount to $6,000. Add that to your $5,000 deposit, and you already have $11,000 saved for the down payment after your first year in the agreement.
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