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"Rent to Own" is a non-traditional avenue for purchasing a
home. Instead of purchasing a property by going to a financial
institution for a mortgage and closing on the home with a loan,
you either sign a land contract (articles of agreement) OR you
rent the property with an option to purchase at a later time.
Both options give you the ability to make a monthly payment as
if you were renting.
Option #1: Land Contract / Articles of Agreement - is the
process when you agree upfront to the purchase terms, close
on the property and make a monthly payment to the seller. The
monthly payment is similar to how you pay rent; but instead,
the payment would consist of principal, interest, taxes and
insurance, similar to a mortgage payment. This is also called
"owner or seller financing". The down payment and monthly
principal payment goes towards reducing the overall principal
balance owed to the seller.
Essentially, the seller of the property is giving you a mortgage
on the property. As sellers are taking a risk, they like to see a
down payment of between 10% and 15% of the purchase price
to see that you have some "skin" in the home.
With a Land Contract, you build your equity while you are
making your monthly payments.
Option #2: Rent with Option - is the process whereby you rent
a property and have the right to purchase the same property at
some time in the future at a given price.
This option is the same as renting, it just gives you the option
of purchasing later on at a predetermined price. You are under
no legal obligation to buy the property if you determine that
doing so is not in your best interest.