This is a very common question, and the answer changes as new laws are enacted which govern what a homeowner can do when they are selling their house under a rent to own agreement.
The major benefit to owning a house is that you will hopefully earn equity as you make payments and pay down the mortgage. The downside, of course, is that the real estate market declines, and the value of your house goes down. In general, however, over the last decades, real estate values have increased more than they have decreased.
One important fact to always remember, as a homeowner, is that during the initial term of your mortgage (first 5 to 10 years), most of your mortgage payment is applied to interest, not principal, so you are not really building up your equity that much as you are not paying down much of your mortgage. However, on the other side, after this initial period, you will see more of your mortgage payment going towards your principal and not interest, and this is when you begin to build up equity in your home.
SO HOW DOES IT WORK WITH A RENT TO OWN AGREEMENT?
When you do a lease option/rent to own agreement in Colorado Springs, there are various types of arrangements you can choose to make….but the most common is that
- You find rent to own house that you like and apply
- You and the house owner agree on a monthly rent and a purchase price, and an “option to buy” fee that basically gives you the option to buy the house for the agreed-upon purchase price at the end of the agreement (usually 1 to 2 years), should you choose to do so.
- You move in and pay your monthly rent and take good care of the house, since it may be yours someday.
It used to be that a homeowner was allowed to let a portion of the monthly payment go towards the purchase of the home as a pre-paid down payment, which was good for all concerned as it helped the tenant buyer reduce the purchase price each month they made a payment, and it helped the homeowner sell the house more often at the end of the rent to own agreement, since the tenant now had some “equity” in the deal.
Unfortunately, a bill was passed recently in Washington DC, called the Dodd Frank Act, which 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 GET A GOOD DEAL WITH A RENT TO OWN CONTRACT
One of the great benefits of renting to own in Colorado Springs is that you get the ability to have the homeowner agree to sell you the house in the future for a price you agree upon today.
This is significant in that, if the real estate market does well during your rent to own term and your house increases in value, the seller cannot raise the price. So, if the value grows over and above your agreed-upon sales price, you have equity in your home, which is the difference between what you are paying for it and what it’s worth in the current real estate market.
NOW, IS THERE A GUARANTEE THAT THE VALUE OF THE HOME WILL GO UP AND YOU’LL MAKE A GREAT DEAL?
Of course not. No one can predict this. But generally speaking a home in most markets and certainly in the Colorado market a home should hold its value or go up in value over time. If you are agreeing on a price today and it’s the market value today then you should be making a good decision and getting the home for a fair price. That’s why it is very important before you sign any agreement to do some research and see if the area the house is in has a good chance of increasing in value or not. Then base the purchase option price on what you have found.
Now, for the last question that you may have…..Do you HAVE TO buy the house at the end of the rent to own agreement.
Absolutely not. If you don’t want to (or can’t) buy the house at the end of the agreement, you can leave, or, if the owner is willing, you can continue to rent. You are not obligated to purchase the house.
However, remember that the seller is legally obligated to sell you the home at the end of the agreement at the agreed-upon price so long as you adhered to the contract terms (i.e. paid on time, weren’t evicted due to a breach of the agreement, etc.)
If you would like to get more information about our local Colorado Springs RENT TO OWN HOMES PROGRAM, simply give us a call at 719-548-4755 or fill out the form on our website to see our current list of AVAILABLE RENT TO OWN HOMES .