Rent to Own vs Mortgage: A Monopoly Explanation
May 2, 2017 by Marty Orefice | Credit, Financing, Real Estate, Rent to Own
Buying a Home and Monopoly
Many children found the American Dream through a family-favorite pastime – Monopoly. The classic board game introduces kids to managing finances, purchasing a property, earning a salary and getting a mortgage. However, the board game misses one great home buying option – rent to own – and it only covers mortgages after a property is owned, not as a means to purchase one.
For that reason, many wonder the differences between rent to own and mortgages. Monopoly, while a great tool for learning, doesn't provide a clear definition of each or how to use them to own property. Can you imagine how much more complex the game would be if it did?
To define each, imagine if, in the game, you land on Park Place – the dream spot – but you don't have enough money to purchase it yet.
What is Rent to Own?
Rent to own starts paying an option fee, for the right to purchase Park Place. So, if the property costs $350 – as Park Place does – you pay $10.50, or 3 percent of the cost of the property to retain the option of purchasing it. This gives you the first option to purchase the property. You pay the option fee the first time you land on the property. Then, when you decide you want to eventually purchase it. In real life, you would pay the option fee when you sign your lease affirming that you want to purchase the property when you qualify for a mortgage.
Then, each turn you pay a given amount of rent money to the owner of the property, in this case, the bank. In real life, you pay rent to the seller monthly. In addition to the rent, you pay a small premium. Eventually, you have enough to put a down payment on the property and get a mortgage to purchase it!
Down payments are usually about 20 percent of the cost of the property. In the case of the Park Place example, that's $70. You've already saved $10.50 toward it with your option fee. So, in this example, you only have $59.5 left to save for the down payment. Each turn, you pay $8 in rent and a $3 premium payment, which is $11 each turn. That means in 20 turns, you have saved enough to get a mortgage and purchase the property!
For a more thorough breakdown of rent to own, check out How Rent to Own Works: A Guide.
What is a Mortgage?
A mortgage means the bank gives you the money to purchase a property and you pay them back monthly over a set period of time with interest. In the case of Park Place, you give the bank a $70 deposit and pay the remaining $280 plus interest to the bank over your next turns.
Like the rent to own example above, you may pay $11 each turn. However, instead of only $3 going towards you owning the property, the full amount goes toward paying off your mortgage. Depending on the interest, you could own the property in your next 25-30 turns.
Rent to Own and Mortgages in Monopoly
The cool thing about the above examples is you will own the coveted Park Place property without having to have the full $350 in cash when you land there. If you play Monopoly by its true rules, if you land on Park Place and can't leverage enough money from your other assets to pay for it, you can't buy it. You must pass over the spot and let whoever lands there next purchase it.
Thankfully, in real life, you have the options of rent to own and mortgages. You don't have to let your dream home get away from you.
Rent to Own vs Mortgage
There is no question about whether you should rent to own or get a mortgage. If you qualify for a mortgage, buy a home with a mortgage. Rent to own is not an alternative to buying a home, it is a path toward purchasing one.
If you qualify for a mortgage, rent to own ends up being a waste of your time and money. You could have used each month’s rental payment as a mortgage payment, and you could have been 1-3 years into paying off your mortgage. Think of the Park Place example above. When your full monthly contribution goes towards owning the home, it gets paid off quicker.
When you play monopoly, you're always trying to move forward to pass go and collect $200 or to purchase property. In real life, you should strive to move forward too. The real-life progression is rent to own, secure a mortgage, purchase a home.
That is to say, renting to own is a great opportunity for people who cannot qualify for a loan. But if you do qualify for a mortgage, renting to own is a step backward in your journey.
In Monopoly, you only move backward if a chance card or a community chest card makes you. In real life, you move backward when circumstances outside of your control make you, like changes in the economy or emergency medical expenditures.
Deciding Between Rent to Own and Mortgages
Just like when you play monopoly, you don't always land on every square. You skip over spots based on what the dice gives you. Sometimes, people land on rent to own and it is there best option. Other times, you skip over rent to own and land on mortgage and that is a great option too.
Unfortunately, homes can't be purchased in Monopoly money and the house of your dreams won't be as cheap as Park Place. However, if you leverage your options well enough, rent to own and/or a mortgage can get you into your dream home!
Dog and House Toy on Monopoly Board Game by Suzy Hazelwood is licensed under the Pexels Photo License.
