Rent-to-own agreements allow potential homebuyers to pay rent while also having the option to purchase the home. A rental premium is an additional fee paid by the renter, which is subtracted from the purchase price if they decide to buy. If they don’t buy, the seller keeps the premium.
A rental premium is a feature of a specific technique for buying a home known as a lease-to-own. This method gives potential buyers the opportunity to live in the home and pay rent, while also giving them the option to purchase the home. In addition to the normal rent, the person renting the home must also pay an additional fee, known as the rental premium, which is subtracted from the purchase price of the home if the tenant exercises the option to buy. If there is no eventual purchase, the seller of the house keeps this additional premium.
Many people want to buy houses but lack the necessary funds to make these wishes come true. One option for people who are a bit short is the rent-to-own option, which combines elements of rent and purchase. The home seller allows the potential buyer to lease the home with monthly rental payments, but also charges additional fees on top of the monthly rent. One of these fees is the rental premium, a unique feature of leasing to own.
The person renting the home must not only pay rent to live in the home in a lease-purchase agreement, but must also pay a monthly rental premium. Most lease-to-own options are completed within a few years, at which time the renter must decide if he or she wants to buy the home. If he decides to buy, all premium payments will be added to and subtracted from the purchase price.
For example, suppose a seller agrees to a lease-to-own agreement that requires a rental premium of US$200 per month and gives the tenant the option to purchase the home after three years. The purchase price of the house is $80,000 USD. After three years, or 36 months, the renter will have paid $7,200 in premiums. If he decides to buy, the price will drop to $72,800, which is the original $80,000 minus the $7,200 in premiums.
Using a rental premium protects the seller from losing out entirely if the renter decides to back out of the option to buy the home. If that happened, the seller would keep all premium payments. The ability to collect premiums, along with the option fee charged to the lessee in a lease-purchase agreement, can make the situation profitable for a seller, even if the purchase option is never exercised.
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