If you're at a place in your life where you'd really rather not be living in an apartment but you don't have the money to buy a home yet, an in-between option can get your foot in the door faster. It's called "renting-to-own " or a "lease option ". Before you consider this type of arrangement, you should be aware of how it works, who benefits and the many things that can go wrong. (Are you ready to take the homeownership plunge? Find out in To Rent or Buy? The Financial Issues .)

How You Can Rent to Own

How It Benefits Sellers

One of the main reasons why a seller might be interested in a rent-to-own arrangement is because if an owner is having trouble selling, rent-to-own provides an alternative to lowering the home's price, taking the home off the market, or renting the home out long term. Because a selling price is established in the lease-option contract, the current homeowner knows exactly what to expect if a sale goes through. If the market declines slightly during the lease period, the sale price is already locked in, but the tenant will probably still be interested in buying the property because of the rent money rebate. Meanwhile, the owner gets help paying the mortgage, property taxes and insurance. Also, unlike a traditional rental agreement, the tenants are more likely to take care of a lease-option property because they have the option to purchase it.

How It Benefits Buyers

The main reason why a rent-to-own agreement appeals to buyers is a financial one. If buyers don't yet have the down payment or the monthly income to qualify for a mortgage but believe they will within the next couple of years, a lease option allows them to accelerate the path to homeownership. By signing a contract now, the buyer locks in a purchase price, which means no worrying about rising home prices. (Note. In a rapidly appreciating real estate market, the seller of a lease-option property would probably want to add a clause to the contract allowing for the price of the home to increase with the market.)

The buyer also does not have to worry about coming up with the money for property taxes, private mortgage insurance or homeowners insurance. and the seller will usually continue to pay for and complete any maintenance and repairs on the home. Finally, by living in the home before deciding to purchase it, a buyer has the advantage of a lengthy test drive on the home before jumping into a major financial commitment. Best of all, if the buyer decides to walk away from the deal, the only consequence is the loss of that portion of the rent paid that was above market rate. If the buyer ends up purchasing the property, the seller will credit part of the rent back to the buyer, often more than the portion of rent that was above market rate. (To read more about mortgages, see First-Time Homebuyer Guide . Understanding The Mortgage Payment Structure and Shopping For A Mortgage .)