Is It Better To Buy or Rent To Own?

The quick answer is: it depends.

Rent to own can be an excellent option for many buyers, particularly those struggling to qualify for a traditional mortgage.

Generally, though, if you have an excellent credit score and can put 20%+ down as a down payment on a property, buying through a traditional lender makes more sense.

However, there are instances when it still makes sense to rent to own -- even if you can qualify for the best mortgage rates.

In this article, we’ll show you why it can be better to rent to own rather than buy (and vice versa)

When is it Better to Rent to Own?

It’s better to rent to own a property when you have no credit score (or a very low credit score), you can’t afford a down payment, and -- this one’s the most important -- the terms of the rent to own contract are favorable.

Why is it better to rent to own when you have no credit score and can’t afford a down payment? Because, for one, you won’t be able to get a mortgage in the first place. Your only other option is a private money lender: an investor who acts like a personal bank. If you decide to go with a private money lender, you can be charged exorbitant interest rates (think 9-15%+). If you’re buying a property for just $180k at 15%, you will pay $27k in interest every year alone. By the time you’re done paying off your house, you’ll have spent enough money to buy the house multiple times over.

But you still might want to live somewhere without throwing money away on rent every month, and you’ve always wanted to own your own home (and maybe pass something on to your children).

That’s where rent to own comes in. You can live at the property for a year or so build up a small amount of equity in the home. Then, at the end of the contract, you’ll be able to exercise the option of purchasing the property. Since you’ve proven that you can take care of the property, you don’t need an excellent credit score or a lot of money down.

There are some situations when you want to avoid rent to own, though, and we’ll talk about those next.

When is it Better to Buy Than Rent to Own?

Some rent to own contracts can be demanding. It’s impossible to say whether or not rent to own is a good or bad option without having details on the exact arrangement. Sometimes you make extra payments, and they don’t end up going toward the down payment on the house at all. Sometimes you’re on the hook for costly repairs, and you lose interest in even buying a home in the first place.

However, suppose you’re dead-set on buying a home. You can qualify for a low mortgage rate with a traditional lender. It might make more financial sense to buy a house outright, and you’ll probably end up locking in a solid interest rate.

Does it ever make sense to rent to own when you could buy? We’ll look at that next.

Does It Make Sense To Rent To Own When I Could Buy?

In short: Yes.

According to CNBC, 61% of Millennial homebuyers have regretted buying their own homes. It’s the American Dream: get a job, find a spouse, and buy your own house -- but many people find that the homeownership part isn’t all that it’s cracked up to be.

Rent to own gives you the option of purchasing at the end of the contract while still allowing you to build a smaller amount of equity. You can think of it as test-driving a house before making the official purchase.

If you find out that you want to be a homeowner, you can still buy the house. On the other hand, if you find out that it isn’t for you, it’s nowhere near as challenging to get out of.

Conclusion: Is It Better to Buy or Rent To Own?

Rent to own is an excellent option for many buyers, particularly ones who can’t secure a traditional mortgage because of a poor credit score or no down payment -- but it also makes sense for people who aren’t 100% sure they even want to own their own homes. It gives you a way of test-driving homeownership while still building equity.

The other option is private money lending, which can sometimes cost you upwards of 9-15%+ in interest.

On the other hand, if you’re sure you won’t have any regrets about buying a home. You can qualify for a traditional mortgage. You can lock in a solid interest rate by buying with a conventional lender.