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Advantages and Disadvantages of a Rent-to-Own Mortgage


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TERMINOLOGY

If you are unable to afford the cost of a new home, you may want to look for a seller who is offering a rent-to-own mortgage. This type of mortgage allows you to apply a portion of your rent payment toward the purchase of the home. You can buy the home after the rent-to-own period, which can be anywhere from a few months to a few years, or walk away at the end of the contract. If this sounds like an interesting concept, there are some advantages and disadvantages you should be aware of before entering into a rent-to-own mortgage agreement.

Advantages

1. If you decide you do not like the home, you do not have to buy it. The flexibility of a rent-to-own mortgage is one of the main reasons it is an attractive option. You are simply testing the home for a certain period, before deciding if you want to purchase it at the end of the rent-to-own agreement.

2. If you are unable to buy a home, by renting first, you can eventually become a homeowner with a rent-to-own mortgage. You can save money to apply toward a down payment on the home, or you can use those funds to buy a different home if you choose to walk away when the contract ends.

3. A rent-to-own mortgage can give you time to repair any damaged credit that may have caused you not to qualify for a mortgage loan. You are applying money every month to the home purchase, while bringing your credit score up by paying down your debt or bringing it current. This will increase your chances of receiving an approval when you apply for a mortgage loan.

Disadvantages

1. If you do not buy the home at the end of the rent-to-own period, all of the money you spent will have been used for rent. You may have been able to rent a smaller place for less money and then applied the savings toward a down payment on a home.

2. If you decide to buy the home after renting it, unless the seller is willing to finance the purchase, you will have to secure a mortgage loan from a lender. If interest rates have risen since you entered into the rent-to-own mortgage, you may not be able to afford the new payment. If you did not have a down payment built into the rent-to-own mortgage, you will need to have the required amount saved in order to get approved for a mortgage loan. This amount varies depending on the lender and your financial strength at the time of application.

3. If you do not maintain the property as agreed or miss a payment, the seller has the option of evicting you if that is written into the contract. Your rent-to-own money would be forfeited, and you could end up back where you were financially before you entered into the agreement.