Posted in Finance, Accounting and Economics Terms, Total Reads: 391
Definition: Rent-To-Own House
Rent-to-own in housing refers to an arrangement (alternative to Mortgage) in which a potential house buyer can rent (at premium) the house for a time period before getting to own the house through regular financing or payment in full.
Normally people go for mortgage (or home loans) to buy a house which they want. They pay a certain amount of money called down payment and then pay rest of the amount as installments called EMIs. Both methods (or agreements) seem similar but there is a difference between mortgage and rent to own.
There are certain buyers in market who may not have enough finances for a downpayment or may not have enough standing or assets for securing a home loan. Rent to own acts as a solution in such cases.
In this agreement, the potential buyer actually takes the house which they want and agree to a slightly premium rent, percentage of which would go to the seller.
The time period agreed is in range of 1-3 years or similar as compared to 20 years in mortgage.
There can also be a small percentage of purchase value of the asset as downpayment. It depends from agreement to agreement.
After this agreement or lease expires, the buyer has the option now to buy the same house and convert this arrangement into mortgage or may be pay in full.
In case the buyer cannot buy at this point there is a risk of losing all premium rent which they paid in last 3 years which means loss when compared to normal rent rates in the area.
There are certain advantages in Rent to Own
1) People actually are able to secure their dream house even if they do not have enough money to mortgage it
2) People can arrange funds in the lease period and buy this house in future.
3) The life in the area can begin early
4) People can fix the purchase price and are able to insulate from future price rises
Lets say John and Julia like a house in a good neighborhood and they want to buy it but they do not have enough savings or standing for a mortgage.
They agree with the seller for Rent to own agreement.
The market rate in the area can be let us say 600$ per month. They agree for a 900$ rent for next 3 years( i.e. 36 months). With the 300$ premium every month, they are able to contribute 10800$ to the purchase price of the house. After 3 years they can opt to buy the house which is already 10800$ cheaper now and can arrange for financing and arrange down payment amount too.