This question keeps coming up over and over again… And to be perfectly honest, the response to this question has evolved over the past few years as a result of the passage of new laws that regulate the actions that a home owner is permitted to take when they are selling their house under a rent-to-own agreement.
One of the most significant advantages of being a homeowner is the possibility of accumulating equity in the home over time through regular mortgage payments and principal reduction.
One thing that a lot of people who own homes forget to take into consideration is the fact that the majority of your monthly mortgage payment to the bank is actually interest for at least the first five years of the loan… Additionally, during the first five years of the loan, a minuscule portion of your payments will go toward paying down the principal and building your equity.
The second half of your mortgage, on the other hand, is typically when the majority of your equity is earned because the majority of those payments go toward the principal. This is because the first half of your mortgage was paid off. Do I Earn Equity With A Rent To Own Agreement?
So how does it work with a rent to own agreement?
When you do a lease option / rent to own home in Gloucester County there are various types of arrangements you can choose to take… but the most common is this:
- You find the rent to own house you like and apply
- You and the rent to own house owner agree on a monthly rent, a “move in” type fee that basically pays for the privilege to have the opportunity to purchase the home late, and the price of the purchase at the end of the rental agreement if you want to buy it.
- You move in and pay your monthly rental payment and treat the house great (since you may be owning it someday).
In the old days of lease options / rent to own agreements, a home owner was allowed to let a portion of the monthly rental payment be applied to the purchase price as a pre-paid down payment.
This was great for everyone!
It helped the tenant buyer earn money off of the purchase each month they made a payment… and it helped the house owner sell the house more often at the end of the rent to own agreement since now the tenant had some “equity” in the deal.
But in recent years a bill was passed in Washington D.C. called the Dodd Frank Act that has placed restrictions on rent to own programs… and has limited the ability to apply rental payments to the end purchase of the home.
But There Is Still Opportunity To Earn Equity With A Rent To Own Contract
You get the ability to have the home seller agree to sell you the house at a price that you and the home seller agree upon today, which is one of the many great benefits of renting to own a house in [market city].
The beauty of it is that even if the housing market improves dramatically during the time that you are renting the property and the value of the property goes up significantly, the seller cannot raise the rent on you.
Therefore, any increase in the value of the property that occurred during the time you were renting it, over and above the purchase price, constitutes your equity in the property.
Now, is there a guarantee that the value of the home will go up and you’ll earn equity?
No, but before you negotiate the rent-to-own agreement, you should make sure to do some serious research to determine whether or not the neighborhood in which the house is located has a good chance of experiencing an increase in property value in the near future. The price of the purchase option can then be derived from that.
Before we come to the conclusion of this piece, you may be wondering if it is required of you to purchase the home at the conclusion of the rental agreement.
The correct response is “no.” If you reach the end of the rent-to-own agreement and realize that you do not want to or are unable to purchase the house, you have two options: either continue renting the property if the owner is willing to let you, or vacate the premises. You are not obligated in any way to buy the house. In spite of this, the seller is obligated to sell the property to you at the agreed-upon price as long as you have complied with the terms of the contract (i.e., you haven’t missed any payments, you haven’t been kicked out of the house for violating the rental agreement, etc. etc.). In the event that you haven’t complied with the terms of the contract, the seller is free to choose another buyer.
If you’re looking to get more info about our local Gloucester County Rent To Own Homes Program… simply give us a phone call at (856) 265-7657 or fill out the form on this website to see our current LIST OF AVAILABLE RENT TO OWN HOMES here >>