Rent-To-Own Vs. Buying: What Is The Difference?

Rent-To-Own vs Buying a Home: Main Differences

One other kind of owning a property is renting a house to buy. Under a rent-to-own, one pays rent and then purchases a house at a set price either inside the lease term or at its conclusion. On the other hand, buying a property means obtaining a loan, making a cash down payment, and immediately acquiring house keys.

If you are not ready or able to accept an ownership arrangement, a rent-to-own might appear preferable; however, knowing the distinctions between the two will help you decide which one would be most suited for you.

How Rent-To-Own Agreements Work?

Under a rent-to---own agreement, the buyer contracts a lease with the property owner with the right to purchase it either after the lease term or throughout its length. Usually, these contracts last one year to five years.

You then have to pay rent, a set fee for the specified period—usually one month. A portion of the payment covers the purchase cost of the house so that, over time, it is paid completely. Should you decide to buy the house, your interest in it is the down payment toward the sales price.

On the other hand, if you follow the conditions of the lease agreement and end the contract early without buying the house, you as the tenant are only liable to pay the stipulated rent during your stay. You also leave, however, without any ownership or part in the land or any other kind of investment.

Advantages and Disadvantages of Rent-to-Own Contracts

Rent-To-Own Pros

You can buy a home at a certain price without having to pay immediately because of financing.
It allows you time to make necessary adjustments to your credit score to meet the requirements for the mortgage.
At the same time, you start to earn some equity with every rent check that goes towards the sale price.
This decision to walk away will not hurt the credit as it would when one buys a house and has to foreclose.

Rent-To-Own Cons

They are usually slightly higher than the average rent in the area and are made every month.
It is often the case that the seller may ask for a balloon payment which is the remaining amount that is necessary to balance the purchase price at the end of the rental period.
Failure to pay rent for some time may lead to loss of the chance to buy as well as any equity accumulated towards purchasing the house.
This means that a part of your rent does nothing toward building home equity as a mortgage payment would do.
Tenants have established rental periods that are usually shorter and do not allow the tenants to fully benefit from the appreciation of home prices.

How to go about purchasing a home?

The home purchase is done by getting mortgage funds from the lender and making a down payment ranging from 3-20% of the cost of the home. The down payment is used to guarantee the financing and the loan is used to pay the remaining balance at the time of closing.

Each monthly payment you make goes towards repaying the amount borrowed also known as loan principal, interest, fees, taxes, and insurance. While repaying the loan in 15 to 30 years, you are creating home equity that you can access in the future through cash-out refinances or home sales.

Your rights in the property and your money are different from when you are a renter; your rights begin at the closing. In most cases, the buyer can move into the house as soon as they close on it after the seller has left.

Advantages and Disadvantages of Home Ownership

Home Buying Pros

Equity is earned and accumulated through gradual repayment of the principal loan amount and increases in the property’s market value.
Interest expenses and property taxes are tax credits, which means they lower your expenses.
Some of the changes that you can make to the house after the purchase include;
Judging from the cost of equity, tax, and appreciation, buying has been estimated to be cheaper per month than renting comparable units.
No landlord can decide not to extend your ‘tenancy’ which makes you be evicted from the house at an unplanned time.

Home Buying Cons

You have to qualify for the loan depending on credit status, income, and down payment to be paid.
In the short run, monthly costs are higher than rents.
As the owner, all costs for maintenance, repairs, and improvements that need to be done will be on your side.
If there was not enough equity, selling at such a time might mean that one would still be paying for the house.
Changes in the individual’s employment status may also influence the ability of the patient to make the payments.

How To Choose: Lease/Option to Purchase or Purchase?

In some circumstances, a rent-to-own can be used as a transitional stage on your journey to becoming a homeowner. However, in most instances, saving for the down payment and purchasing a house outright is still the most sustainable in the long run.

Consider the following when deciding if rent-to-own makes sense or if you’re better off buying immediately.

Financial Position – Are you in a position to meet the income and credit requirements necessary to obtain enough financing to buy now? If not, use the rental period to build your credit history. Pay a down payment instead of paying a premium in rent in the form of forced savings.
Expected Length of Stay - Do you want to reside in an area for less than five years? The short term alone may make renting to start better than buying only to sell again soon after.
Home Price Appreciation – Are you optimistic about price increases in homes over the next five years? High appreciation supports buying to amplify the profits. The sluggish expansion could mean that the mobility associated with renting is more advantageous.
Affordability of Installment Payment – Do not be duped into thinking that rent-to-own is cheaper than purchasing because of the small initial cash outlay. Consider the additional cost within the price, plus what you could save in the long run by investing through equity growth and tax benefits.

Overall, the question of which is wiser financially strongly depends on your circumstances and market realities. Seek advice from other real estate agents in your region when considering the advantages and disadvantages of rent-to-own terms as opposed to purchasing.

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