Homeownership is an important step in everyone’s lives. When it’s finally time to take that step, you may question which route is right for you: signing a rent-to-own agreement or getting a mortgage and purchasing a home. As with any decision, there are pros and cons to each.
The rent-to-own option describes a real estate property that is leased in exchange for a monthly payment, with the option to purchase the property during — or at the end of — the agreement.
Landlords typically charge more for these types of leases, with the costs sometimes hidden in a higher monthly rate. In certain cases, the costs of the lease option may be an additional charge applied to the rent or charged as a separate fee. In a rent-to-own agreement, a portion of the monthly rent check goes towards paying for the home, regardless of whether or not the renter chooses to own the property later down the line.
RTO lease options have a fixed price, usually based on the market value of the home at the time of the lease signing. This means that renters who sign an RTO agreement when the market is depressed can gain substantial value if they choose to buy the home in the future for less than what the value may be when home values rise. However, the fixed price can also be a drawback in opposite circumstances.
The biggest con to be aware of when considering a rent-to-own agreement is the uncertainty aspect. When a renter enters an RTO agreement, there is no guarantee that the renter will purchase. The cost of the home may end up being more than its value after all of the payments have been made. Also, if a renter decides not to purchase the house at the end of the lease, they will most likely not get a refund on payments made, which could have been going towards a mortgage the entire time.
Rent-to-own vs Mortgage
Another option that homeowners can choose is purchasing a home.
There are many benefits to owning a home. In fact, specialists say that if you are in the financial position to do so, home ownership may be your best option. A mortgage payment gives you the ability to remain in residency. In addition to that, a mortgage helps you to build equity. Purchasing a home gives you the ability to obtain a mortgage, which has the benefits of a tax deduction, and in turn, a bigger refund check from the IRS. Owning a home helps to build equity by principle pay down and by home appreciation.
Equity can be used for many different things, including extra funds, debt consolidation, and home improvements. It can also include interest payments, which are tax deductible. Home values often increase over time, meaning that a person who chooses to go with a mortgage may end up paying far less than its financial worth down the line. Finally, mortgage payments also help to improve your credit score.
In any case, owning a home will be more beneficial long-term, if you are in the financial position to purchase.