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Mortgage Interest and the Rent to Own Model

by | Jan 28, 2022 | Rent to Own

Mortgage Interest and the Rent to Own Model

Many people who cannot currently obtain a mortgage from a traditional lender or bank still want to own a home. After all, that’s been the American Dream for generations, right? For these people, entering a rent-to-own agreement is an alternative option. This option could be absolutely perfect for you. Don’t miss out: click here to begin the process of qualifying for your very own rent to own home right now.

The Rent to Own Model and Mortgage Interest 

Rent to own is a middle ground between renting and buying; the tenant will pay a monthly rent to the landlord and at the end of the lease they have the option and the right to purchase the house. This allows the buyer to save their money for a down payment, improve their credit, and pay towards the future purchase price of the house. 

However, before signing this agreement with a seller, be sure to learn how to figure out your payment plan and the mortgage interest. 

When you sign the contract, you are agreeing to pay rent on the property for an agreed amount of time. This time will typically span between 1 to 5 years, though it could be shorter or longer depending on your situation. Because there is no set-in-stone contract in rent-to-own, most terms will be negotiable with the seller.

The contract should include the same terms as a traditional rental property with a few key additions, as you will need all of this information to later determine the total purchase price and the interest rates you will be paying. (Be sure you’re not missing out: click here to find the perfect rent to own home for your exact situation.)

The rent-to-own contract will conclude:

  • The agreed-upon purchase price.
  • The option fee.
  • The interest rate.
  • The amount of rent and how much will go toward your equity.

To determine your interest, begin by subtracting your option fee. This works in the same vein as a down payment, but it holds and is credited to your legal right to purchase the house at the agreed price. The percentage varies but is usually between 1 and 7 percent – the most popular being 3 percent. 

If the agreed-upon purchase price is $500,000 and paid 3 percent down – $15,000 – then your loan amount would be $485,000. 

Using some simple math in the previous example, multiply the loan amount by the agreed interest to find out your annual interest. If the loan amount is $485,000 and the interest rate is 5%, multiply $485,000 by .05 to calculate $24,250. 

Then divide the annual interest – $24,250 – by 12 to determine the monthly interest payment. With this example, the monthly interest would be $2,021 every month. 

Your interest rate will decrease each month if you make monthly payments toward the agreed purchase price on the house during the rental period. Use an online amortization table tool to get specific detail on how much your monthly interest will be with payments. 

Ultimately, these parameters will help you determine whether renting to own is right for you. Part of that process will involve thoroughly researching the property, the contract, and the seller. Look at where you are financially and where you would like to be. Definitely consider consulting a real estate agent or an attorney before you sign any paperwork. It’s worth your time to do this because it can be tricky to navigate a legal contract without knowing as many details as possible. 

Something else that you’re going to want to consider as you work toward becoming a homeowner is whether or not you should keep your mortgage or pay it off early. You know that here at The Renter’s Best Friend we want to provide you with as many resources as possible. Check out this article for more information on how to pay off your mortgage early and if it’s right for you.

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