Monday, March 19, 2012

Rent To Own

We are all familiar with the concept of rent to own. Hopefully, not from personal experience.

It works like this: You don't have any money for a washing machine, furniture, computer. You don't have adequate credit to borrow. You want something now but have no money. In many of these cases the buyers who rent to own end up paying nearly twice as much for an item than they would have if they had the money to buy it.

We are so much smarter than that, we would never think about renting to own anything. We can smell a trap when we see it.

BUT, we fall for it when it comes to our homes. We can't afford them. We don't have any money. Everybody has one. We want one. So we borrow the money and essentially "rent to own" a house.

When you sign your mortgage documents you will receive a large stack of papers. One of which will be a disclosure statement with the following information:

Your Annual Percentage Rate - the cost of your credit as a yearly rate.
Finance Charge - the dollar amount the credit will cost you.
Amount Financed - the amount of credit provided to you.
Total of Payments* - The amount I will have paid after I have made all payments as scheduled.
*note this amount is only the principle and interest, it doesn't include the property tax or insurance you will also pay.

What if I told you, that if you were to finance your home with a 30 year mortgage and made payments for those 30 years (without refinancing, or taking out a 2nd mortgage against your equity, etc) that you will come close to paying double. Sounds like rent to own to me.

It is true.

This is what our Disclosure Statement(s) told us 

APR 4.925% (2009 - I know they are lower now)
Finance Charge  $114,475
Amount Financed  $137,206
Total Payments $251,691

You will also receive an amortization schedule that will map out when each payment is due, and if paid on that date, what amount will be paid towards interest and towards principle. It is a fascinating document. You can play with one here.

But that is just part of the story. You will inevitably spend money on your house which will increase your actual costs of owning a home outside of the mortgage.

I have already warned my husband that we will never have a 30 year mortgage. I don't care how long we have to wait.

Next: When It Is Time To Sell - The Final Story.

1 comment:

  1. I am not sure what it is with owning a home that supposedly puts people over the edge into full adulthood. I never wanted a house, because I don't want to feel tied down. But being a renter instead of a homeowner is something that gets waved in your face as stunted adolescence. It is almost worst than the whole having kids/not having kids dichotomy, because it seems more people are on the buy side of the rent/buy war.


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