Pros and Cons of Rent-to-Own Homes

Rent-to-own homes can be a good option for aspiring homebuyers who have had trouble saving up for a down payment. This arrangement allows you to rent the home and pay a little extra rent that’s credited toward an eventual down payment that you can use to buy the home at the end of the lease. This makes it easier to save up a down payment while still having a place to live and taking time to get ready to take on a mortgage.

But rent-to-own homes also have downsides, such as an option fee you’ll have to pay upfront. Plus, it’s not always easy to find rent-to-own homes.

“In general, rent-to-own agreements offer tenants the opportunity to lock in a purchase price for the property and build up equity towards the purchase while renting,” says Adie Kriegstein, a real estate agent and founder of the NYC Experience Team at Compass in New York. “However, they also come with risks and complexities, such as the possibility of losing the option fee and not being able to secure financing to buy the property at the end of the rental term.”

Advantages of Rent-to-Own Homes

Here’s a look at the benefits of rent-to-own homes:

• You can save for a down payment over time. If you’ve been having trouble saving for a down payment, a rent-to-own contract lets you do so while paying rent.
• You can save money on repairs. With rent-to-own, the tenant and landlord typically split repair costs. It’s also common for the tenant to handle small repairs, while the landlord pays for the big ones.
• You have time to build credit. If your credit needs a boost — or you have no credit — a rent-to-own arrangement can help you build a credit history and raise your credit score, which can make it easier to get a mortgage and a lower interest rate when it’s time to buy.
• You can decide later whether to buy. With lease-option contracts, you don’t have to decide to buy the home until the rental term ends. If you change your mind, you can just walk away.

Disadvantages of Rent-to-Own Homes

It’s also important to keep in mind the drawbacks of rent-to-own homes, which include:

• They are more expensive. Rent-to-own homes often have a higher price tag than other homes.
• You have to pay an option fee. Even though the option fee will be credited to your down payment if you buy the home, it’s still an upfront cost.
• You lose the money you saved if you don’t buy. If you decide against buying the home, you typically will lose your option fee and the amount that’s been credited toward the down payment.
• If you can’t secure financing, you might not be able to buy. If you fail to qualify for a mortgage at the end of your lease term, it will jeopardize your ability to buy the home and likely cost you money.

Pros vs. Cons of Rent-to-Own

Here’s another way to weigh the upsides and downsides of a rent-to-own home arrangement:

Rent-to-Own vs. Mortgage

If you’re trying to decide whether you should go with a rent-to-own home or stick to a traditional mortgage, here are some factors to consider:

Rent-to-Own and Your Credit

A rent-to-own home can be a good option for prospective homebuyers who don’t have good credit — or any credit at all. After all, your credit score is a major factor that mortgage lenders consider when deciding the interest rate they’ll charge you for a loan, which in turn affects how much you pay each month and overall for your mortgage.

Rent-to-own homes give you more time to increase your credit score, which can save you money down the line. To get those benefits, you’ll need to pay your rent and other bills on time each month. It also can help for you to improve your credit score by paying down your existing debt and keeping your credit utilization ratio low.

3 Tips for a Successful Rent-to-Own Experience

Here are some tips on how to have a positive rent-to-own experience.

1. Do your research

Before signing a rent-to-own agreement, make sure you do your research on the home, the seller, and the contract. Be sure you understand how and when the purchase price of the home will be determined. Also, confirm the timeline for the transition, as well as the rental price and option fee amounts.

2. Get a professional inspection

When you buy a home, you usually order a home inspection to learn the condition of the home and to identify any flaws, damage, or safety hazards. You also should order a home inspection before you enter into a rent-to-own agreement. Even if you don’t end up buying the home, it’s wise to know exactly what you’re getting into before you commit to a long-term deal.

3. Consult with a real estate attorney

It’s always advisable to have a lawyer review a contract before you sign it. In addition to explaining all the legal lingo, an attorney can help you confirm the legality of the contract and make sure that you’re getting a fair deal.

FAQ

Here are answers to some frequently asked questions about the pros and cons of rent-to-own homes.

Why is it better to own than rent?

Owning a home gives you the opportunity to build home equity, which is the difference between what your home is worth and how much you owe on it. With each mortgage payment, you build equity and own a larger piece of the home. The more equity you build, the more wealth you accumulate, and you can use your home equity through a cash-out refinance, home equity loan, or home equity line of credit, or by selling the home. Paying rent does not build equity.

Why might people choose to rent a home rather than buy a home?

Some of the perks of renting include:
— You don’t have to pay as much money upfront. Buying typically requires you to make a down payment and cover closing costs.
— It’s easier to move. Homeowners have to worry about selling their home while looking for a new place to live, which can take much more time.
— You don’t have to worry about your home’s value declining. Renters don’t have to be concerned about losing equity or owing more on their mortgage than their home is worth.