Monday, November 17, 2014
Rent-to-own (RTO) refers to the arrangement by which a renter is allowed to buy the property after the term of the lease.
In a rent-to-own setup, the buyer pays monthly rent inclusive of fees that are set aside for the downpayment. Once the term of the lease ends, the buyer can opt to purchase the property, paying off the remaining balance with the help of a mortgage. Should the buyer forfeit the property instead, often, no portion of past payments will be refunded to his name.
Rent-to-owns pose a number of advantages and disadvantages to the buyer. Take a look at the pros and cons to determine whether you should rent to own:
No mortgage needed. A rent-to-own allows you to acquire and move into the home sans the mortgage. This comes in especially handy for individuals who have yet to build the credit score to qualify for a mortgage.
A “test drive” phase. As a buyer, you have the option to live in, and therefore “test drive” the home, for a couple of years. Once the term of the lease ends, you can opt to walk away from the property should you find it not to your liking.
You can build your credit. The term of the lease allows you to build your credit score. Make sure to pay the rent fully and responsibly each month until the end of the lease. As such, by the time to make your purchase, you should ideally have built up a good credit portfolio to get approved for a mortgage.
Steeper rent. Due to fees paid on top of the rent, rent-to-own homes have higher rates than the typical lease agreement.
Forfeited payments. Should the buyer opt out of the property, payments made during the term of the lease will be forfeited.
Depreciating costs. During the term of the lease, changing market trends may depreciate the value of the property. As such, the renter find himself paying much more than what the property costs in the current market climate.