A mortgage is not a lease. Quite simply. People are deterred from home ownership everyday because they have been misinformed. Some confuse similarities that don’t exist. I’ve been selling real estate for four years in Michigan and I have heard my share of horror stories. Deadbeat landlords, Rent to Own scams, The Zestimate said… The absolute worst story is that of the qualfied renter that has NEVER applied for a mortgage.
I’m here to help you avoid those mistakes by arming you with knowledge.
Before we dive into how Mortgages and Leases are different and understand the function of each, we should get some definitions out of the way.
A lease is an agreement between the renter and landlord for a certain time period (typically 1 year) holding the renter liable for the agreed upon rent for that time period. A lease also spells out other things like rules for the renter and responsibilities of landlord.
Rent is the agreed compensation for that lease. Rent and Lease are separate terms that mean different things. Legally they are not interchangeable.
Here’s how How a mortgage works: You get a loan for a house. You buy the house with this loan. You pay interest and principle over decades. After you’re done paying, you own the house.
The loan is “secured” on the borrower’s property. This means that a legal mechanism is put in place which allows the lender to take possession and sell the secured property if you don’t pay.
Really the question is, How Do you really know the difference? Which one is best for you? How can you make an informed decision on what is best only experiencing one flavor of the Kool-Aid?
The most common argument I hear against buying a house is, “I don’t want to be tied down.” “I like to travel. I can’t travel if I’m paying a mortgage for 30 years.” CowPoo! Of course you can travel when you own a house. Affordability is relative. The best part about owning something is that you can get rid of it without consequence. Its especially true when you understand Leverage — use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.
The Best part about Leverage is that you remain in control of the situation. When paying down your mortgage you own a little bit more of your home each time. The financial piece of the home you own is called, Equity. You can mortgage this equity and leverage it to make improvements in your home or you can immediately sell the home for more than you owe and collect the equity as cash.
This is a MAJOR benefit over leasing. Consider asking your landlord if you can give your lease to someone else and they pay you rent instead of him.
What do you think the reaction would be?
On the flip side, the shorter terms of Leases are a benefit to a great many people. Not everyone can afford to buy a home right away. They may not have enough in savings, or may not meet the requirements to obtain a mortgage for reasons that are not always financial in nature. This percentage of the population is relavant and they too need a place to stay. This is the reason there will always be apartments, homes and condo associations that allow people to pay rent. It’s a thriving business and the people making the money, getting their mortgages paid will not just let it disappear.
What we see as a result of the most affordable mortgage interest in US History is a rise in these rental rates that is not going away anytime soon.
Its a benefit to any real estate investor. You will get frustrated renters looking to buy your flips and disgruntled home seekers that will need to rent from you due to lack of inventory in down seasons. It’s silly to think no one needs to lease some sort of shelter. Or that renting is somehow an indicator of a lessor homeowner. It’s just another flavor of real estate for your consumption.
What’s your favorite flavor of Real Estate? Would you Buy or Lease based on what you know now? Tell me in the comments and share this blog post with your friends on Facebook to see what they would do?