Two paths to owning a home
If you're hoping to achieve your dreams of homeownership, rent-to-own and mortgage are two options to consider. Here is everything you need to know about these unique approaches to home ownership.
Have you decided to be a homeowner? The first step is to determine whether you qualify for a mortgage. However, if your credit score is low or you haven't saved enough money for the down payment and closing costs, it may be difficult to purchase a home the regular way.
In this case, an alternative option would be a rent-to-own home where you rent a house for a certain period of time with the option of buying it in the future. Weighing the pros and cons of rent-to-own homes versus mortgages will help you decide the best course of action.
How rent-to-own works
Rent-to-own homes allow you to rent the house you intend to buy for a specific period of time. Your rental payments contribute to the purchase of the house. There are two types of rent-to-own contracts:
· Lease option agreements that give you the option to buy the house at the end of the lease.
· Lease purchase contracts that obligate you to buy the home.
If you're considering the option of renting to own, be sure to consult a real estate lawyer who will review the contract and advise you accordingly. In addition, enlist a professional to inspect the home just like in a traditional home purchase in order to look for any major defects.
Rent-to-own: what works in your favour
· You get to live in your dream house without having to pay costly mortgage fees. This is because most rent-to-own sellers accept lower credit compared to mortgage lenders.
· You get to test-drive the home and the neighbourhood to determine whether you like it before purchasing. If not satisfied, you can always opt out before the lease ends. This helps to eliminate buyer's remorse.
· There is a pre-agreed purchase price for the home. Even though it's higher than the current market value, the purchase price doesn't rise. This gives you peace of mind even in a rising market.
· Your equity grows as you continue to pay the rental instalments. As a result, you have time to improve your credit score.
· It enables you to accumulate long-term wealth. There's reduced stress of moving as you get settled in the rented house.
Rent-to-own: what doesn't
· You're required to pay non-refundable upfront fees and monthly rent payments.
· There's potential foreclosure if the homeowners forfeit the mortgage payments.
· The purchase price is higher than the current market value. In addition, rent is higher than the traditional way of renting.
· You have to cover maintenance and repairs.
· You're at a disadvantage when the market prices go down as the purchase price is fixed.
How mortgages work
If you're looking to buy a home but don't have all the cash upfront, a mortgage is a viable option. A mortgage is a home financing loan that allows you to buy a home now and pay it off over time with regular repayments. When applying for the mortgage, the lender requires you to meet minimum eligibility criteria, including a good credit score and consistent income.
The home acts as collateral to the mortgage such that if you stop making your mortgage repayments, you lose the house. The most popular types of mortgages available include:
· Fixed-rate mortgages whose interest rate remains constant for the entire loan term.
· Adjustable-rate mortgages whose interest rate changes periodically based on the prevailing market rates.
Although purchasing a home is seemingly the right option, it has its upsides and downsides. Here are some of the arguments for the mortgage option:
Mortgage: what works in your favour
· Longer-term mortgages are becoming increasingly available, making it an easier option for homeownership.
· Mortgage interest, as well as real estate taxes, are deductible, which reduces your taxable income.
· Paying your mortgage is a way to build your investment potential over time.
· The government has introduced programs such as federally-backed mortgages and tax breaks to encourage entrance into the real estate market for first-time homebuyers.
Mortgage: what doesn't
· If you don't keep up with the mortgage repayments, you could potentially lose your home.
· Mortgage interest rates are continually changing, and can drastically increase.
· The overall mortgage payment over the years is high.
· In addition to interest, there are various other fees associated with mortgages. These include underwriting costs and remortgaging fees.
· The value of your home may decrease as the market fluctuates.
Deciding what fits your situation
In a nutshell, you should do enough due diligence to determine which option best suits your needs and current financial situation.
Creating happy homeowners by providing personal bespoke mortgage solutions with uncompromising service.
Matt Broom-Hall Mortgage Broker & Happiness Creator Hello Mortgage Team [sayhello@hellomortgage.ca](mailto:sayhello@hellomortgage.ca)
