This problem keeps recurring.… In all candor, the answer to this question has evolved over the past few years due to the passage of new laws limiting the rights of homeowners when selling their homes under a rent-to-own agreement.
As you make mortgage payments and eventually pay off the loan, you’ll hopefully build equity in your home.
One thing many home owners don’t take into account is that the majority of your monthly mortgage payment to the bank is comprised of interest for the first five years (or more). Moreover, for the first five years, a negligible portion of your payments will go toward reducing the principal and building equity.
However, equity is typically built up during the second half of a mortgage because most payments are applied directly to the principal.
So how does it work with a rent to own agreement?
There are a number of different lease-option and rent-to-own agreements that can be made when purchasing a home in South Jersey, but the most typical goes like this:
- You search for a suitable rent-to-own property and apply for it.
- You and the owner of the rent-to-own house will come to an agreement on the monthly rent, a “move-in” fee that essentially pays for the opportunity to purchase the home late, and the purchase price at the end of the rental agreement if you want to buy it. All of these terms will be included in the rent-to-own agreement.
- You move in, pay your rent on time each month, and take good care of the house (in the hope that you will eventually be able to call it your own).
In the old days of lease options / rent-to-own agreements, a portion of the rent could be used as a down payment if the landlord agreed to the arrangement.
Everything worked out wonderfully!
Every month that a payment was made, the tenant-buyer earned interest on the purchase price. Since the tenant now had “equity” in the deal, the owner could sell the house more frequently at the end of the rent-to-own agreement.
However, in recent years, a law known as the Dodd Frank Act was passed in Washington, DC, which imposes regulations on rent-to-own programs. and has restricted tenants’ ability to put rent money toward a future home purchase.
But There Is Still an opportunity to earn equity with a Rent To Own agreement.
The ability to negotiate a price with the home seller and have them commit to selling you the house at that price right now is a major perk of the rent-to-own model in the South Jersey market. This is one of the major benefits of the rent-to-own model in the South Jersey market.
The beauty of this arrangement is that the seller cannot increase the price even if the market does exceptionally well during your rental term and the value of the house increases significantly.
The difference between the original purchase price and the increase in value of the home during the rental period is your equity.
Now, is there a guarantee that the value of the home will go up and you’ll earn equity?
No, but before you sign a rent-to-own agreement, you should do some research to determine whether or not the community where the property is located is experiencing an increase in the value of homes. The price of the purchase option can then be determined based on that number.
Before we wrap up this article, I wanted to address a question that you might have about whether or not you are required to buy the home at the conclusion of the rental period.
The answer is no. At the end of the rent-to-own agreement, if you decide you don’t want to or can’t buy the house, you can either continue renting from the owner (if the owner agrees) or move out. You are under no obligation to buy the house. If you’ve been a good tenant and haven’t missed any payments or been evicted for breaking the lease, for example, the seller is obligated to sell you the house at the agreed-upon price.
To learn more about our South Jersey/PA Rent-to-Own Homes Program, please feel free to… To contact us, please call (856) 265-7657 or use the online form provided. see our current LIST OF AVAILABLE RENT TO OWN HOMES here >>