Buying a home is the great American dream, but not everyone qualifies. For those who can’t qualify, one very attractive option is a rent-to-own program, which has the renter moving in while working toward buying. With rent-to-own programs, the seller gets the benefit of selling the home to an eager homebuyer at the end of a lease period and the buyer can lease until buying.
TL;DR (Too Long; Didn't Read)
To calculate mortgage interest on a rent-to-own purchase, you’ll use an online mortgage calculator, basing the calculations on the purchase price for the home and deducting any rent premiums that will be going toward the down payment on a monthly basis.
About Rent-to-Own Agreements
Leases for rentals can already be complicated, but the setup for a rent-to-own situation is even more challenging. When you agree to rent to own a home, you’ll have to sign paperwork to cover both the time you’re a renter and your potential commitment to purchase the home once your lease comes to an end. There are two types of rent-to-own contracts for homes:
- Lease-option contracts – With this type of contract, you have the option to buy the house at the end of your lease. The seller and buyer agree on a price when the lease is initially signed, but they can back out as long as they follow the terms of the contract.
- Lease-purchase contracts – This type of lease contractually obligates the renter to purchase the home at the end of the lease term. The renter will sign both a lease agreement and a residential purchase agreement before moving in.
Rent-to-Own Calculator for Seller
Before you sign on the dotted line, it’s important to make sure you’ll be able to afford the house once you reach the end of your lease term. Your purchase price will be outlined in the contract from the outset, but if it’s a lease-option contract, either the seller or buyer can back out of the deal as long as they follow the terms that were outlined in writing. Even if you can back out, though, it will save you time and help you sleep better at night if you know exactly what your monthly payment will be when your lease ends.
In order to determine your monthly payment, you’ll need to look at the interest rates and other fees you’ll pay when you buy your home. One of the easiest ways is to use one of the many mortgage calculators available online. One of the ways to have rent-to-own interest rates and fees calculated is to use a calculator that sellers use.
Determining the Purchase Price
Before you sign your rental agreement, both you and the seller will need to negotiate a purchase price. This will be based on what your seller thinks the property will be worth at the time your lease expires, so feel free to do some research of your own to make sure the price is fair. If it’s a lease-option contract, you’ll both be able to back out if the value changes dramatically, but if it’s a lease-purchase contract, the obligation will be set no matter what happens with the market.
Once you’ve determined the price the seller is putting on the home purchase, use an online mortgage calculator to figure out what your monthly payment will be. In addition to the interest you’ll pay on the principal each month, you’ll also need to estimate the property taxes and homeowner’s insurance that will be tacked on, so this may require some research into what people in your area are paying.
Figuring Down Payment Costs
A rent-to-own calculator for sellers can help you determine how much you’ll pay in interest, but it leaves out an important factor: the down payment you’ll be asked to pay at closing. The good news is, that premium you’re paying each month will go toward your down payment. However, you’ll need to be able to estimate how much that down payment will be to make sure your monthly rent premiums will cover it. Otherwise, you’ll have to set money aside to cover the shortage.
The exact down payment you’ll need varies depending on the type of mortgage you get. If you’re after a conventional mortgage, your premiums will need to add up to at least 3 percent of the purchase price if your credit is in the exceptional range. Most borrowers will need between 5 and 20 percent of the purchase price for a conventional mortgage. FHA loans go as low as 3.5 percent of the purchase price.
Mortgage Insurance Costs
One expense that can be easy to forget is mortgage insurance, which applies regardless of the type of loan you’re getting. With an FHA loan, you’ll be required to pay 1.75 percent of the loan amount upfront for mortgage insurance. Additionally, you’ll pay between 0.45 percent and 1.05 percent of the loan amount each year for the term of the loan.
Although rent-to-own interest rates and fees calculated can make conventional loans look less attractive overall, especially if the down payment requirement is higher, you can save when it comes to mortgage insurance. Conventional loans require something called private mortgage insurance, which you won’t even have to pay if your down payment equals 20 percent of the loan amount or more.
Option Fees and Rent Premiums
In addition to rent-to-own interest rates and fees calculated in advance, you need to look at the extras you’ll pay for setting up your lease this way. One of the biggest is the option fee you’ll pay when you sign the lease. This fee is negotiable and usually will be between 1 and 5 percent of the agreed-upon purchase price of the home. So if you’ve agreed to pay $200,000 to buy the house when your lease is up, you’ll pay from $2,000 to $10,000 when you sign your lease.
Perhaps the biggest extra expense when you’re renting to own, though, is something known as a rent premium. A rent premium is that extra amount added to your rent each month that goes toward the purchase price of your house at the end of your lease. If you have a lease-option contract, it’s important to note that if you decide not to buy, you’ll lose all that extra money you paid.
Maintenance During Lease and After
As you’re crunching numbers using the rent-to-own calculator for sellers and figuring out if you can afford to buy your house, you need to also keep in mind the many expenses that come with owning a house. These expenses may kick in immediately, depending on how your contract is worded. Some landlords opt to take care of all maintenance costs during the time the occupant is paying rent, while others will put the maintenance on you, the presumed future owner of the property, from the time you move in.
But whether you’ll be paying those costs from the start or not, you should consider the monthly cost of homeownership as you’re looking at the numbers on the mortgage calculator. You’ll probably need to take care of all of the landscaping upkeep, which may mean paying someone hundreds of dollars a month during the warm months of the year. There’s also the cost to repair all the things that can go wrong with a house, like HVAC unit malfunctions and plumbing problems. Those will all fall on you once you’re the official owner.
- The Mortgage Reports: Guide to Lease Options and Owner Financing: Are Rent-To-Own Homes a Good Idea?
- US Legal: Lease-Purchase Law and Legal Definition
- Mortgage Calculator: Homepage
- US News & World Report: FHA vs. Conventional Loans in Plain English
- Housing List: What is a Rent-to-Own Option Fee?
- Dave Ramsey: How Does Rent-to-Own Work?
- Bankrate: How Does Rent-To-Own Work?
- Rent to Own Experts: Rent to Own Calculator
- Nerdwallet: How Does Rent-to-Own Work?
- Bankrate: Your Guide to FHA Mortgage Insurance
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.