Do I Earn Equity With A Rent To Own Agreement? The straight answer is that you do not earn equity with a rent-to-own agreement. If you decide not to purchase the house at the end of the rent-to-own agreement.
This question comes up again and again… and honestly, the answer to this question has changed in recent years based on new laws enacted that affect what a homeowner can do when they’re selling their house under a rent-to-own Contract.
One of the great benefits of owning a house is that you (hopefully) earn equity as you make payments and pay down the mortgage.
One thing many homeowners don’t take into account is that really during the first 5 years (or more) the majority of your mortgage payment to the bank is interest… and very little of your payments for the first 5 years actually goes to pay down the principal and earn you equity.
But on the flip side, the 2nd half of your mortgage is usually where the majority of your equity is earned since most of those payments go to the principal.
So how does it work with a rent-to-own agreement?
When you do a lease option/rent to own home in Houston there are various types of arrangements you can choose to take… but the most common is this:
Certainly, here are the key points for a rent-to-own Contract:
- Lease Duration: In a rent-to-own Contract, the prospective buyer rents the property for a predetermined period, as we all know the typical rent-to-own agreement lasts between three and five years.
- Purchase Option: The Contract grants the tenant the option to purchase the property before the lease term expires, providing an opportunity for potential homeownership.
- Detailed Contract: Both the buyer and seller collaborate to draft a comprehensive contract that specifies all terms and conditions of the rent-to-own arrangement, ensuring clarity and legal compliance.
- Monthly Rent: The contract outlines the monthly rent amount, which may include a portion allocated as a credit toward the property purchase.
- Agreed-Upon Price: The purchase price is established within the agreement, providing clarity on the amount the tenant would pay if they decide to buy the property at the end of the designated time frame.
- Flexibility: Rent-to-own agreements offer flexibility for tenants to assess the property and their ability to purchase it before committing to full ownership.
- Benefits: These arrangements can be advantageous for both buyers and sellers, allowing potential buyers to gradually move towards ownership and providing sellers with income and potential future property sales.
- Considerations: Rent-to-own agreements require careful consideration and adherence to contract terms, making them a suitable option for those with a clear intention to buy the property in the future.
In the old days of lease options/rent-to-own agreements, a homeowner 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 2010 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.
Can I get my money back if I decide not to buy the house?
The outcome of this question relies on the specific provisions within the rent-to-own agreement. Typically, if you opt not to buy the house at the end of the rent-to-own agreement, a refund of your payments is not anticipated. Nevertheless, certain agreements may permit a portion of your rent payments to contribute towards the home’s purchase price.
It’s vital to understand that a rent-to-own arrangement does not generate equity. Should you decide not to proceed with the purchase at the agreement’s end, your options include continuing to rent, provided the owner consents, or departing from the arrangement altogether.
But There Is Still Opportunity To Earn Equity With A Rent To Own Contract
One of the great benefits of renting to own a Houston house is that you get the ability to have the home seller agree to sell you the house for a price you agree upon today.
And the beauty is… if the market does really well during your rental term and the house goes up in value a lot… the seller can’t raise the price on you.
So whatever home value growth happened during your rental term over and above the sales price… that’s your equity!
How does rent-to-own affect my credit score?
Rent-to-own arrangements typically don’t have a direct impact on your credit score. Nevertheless, by consistently making on-time payments within your rent-to-own agreement, you can gradually build a positive credit history.
It’s crucial to recognize that rent-to-own agreements differ from conventional loans or mortgages, and thus, they may not be reported to credit bureaus in the same manner. However, it’s worth noting that certain rent-to-own companies might choose to report your payments to credit bureaus, which, in turn, can assist in establishing a credit history.
If you’re contemplating a rent-to-own agreement and have concerns regarding its potential effect on your credit score, it’s advisable to inquire with the landlord or the company about their policies on payment reporting to credit bureaus. Additionally, regularly monitoring your credit report is a prudent step to ensure the accurate reporting of all your payments.
Now, is there a guarantee that the value of the home will go up and you’ll earn equity?
No, but just make sure that when you’re negotiating the rent-to-own agreement you really do a bit of 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 that.
Before we wrap this article up… you may have the question of whether you HAVE TO buy the house at the end of the rental term.
The answer is no. If you decide you just don’t want to (or can’t) buy the house at the end of the rent-to-own agreement… you can just continue to rent if the owner will allow it or you can leave. You’re not bound to purchase the house. However, the seller is bound to sell you the home at the predetermined price as long as you follow the contract terms (i.e. – you didn’t miss payments, you weren’t evicted from the house because of a breach of the rental agreement, etc., etc.).
If you’re looking to get more info about our local Houston Rent To Own Homes Program… simply give us a phone call at (832) 210-3088 or fill out the form on this website to see our current LIST OF AVAILABLE RENT TO OWN HOMES here >>