This question comes up again and again… and honestly, the answer this question has changed in recent years based on new laws enacted that affect what a home owner can do when they’re selling their house under a rent to own agreement.
One of the big benefits of owning a house is that you (hopefully) earn equity as you make payments and pay down the mortgage.
One thing I see many homeowners overlook—especially first-time buyers—is how slow equity builds in the early years of a mortgage. For the first 5–7 years, a large chunk of your monthly payment goes straight to interest, not toward paying down the loan principal. This means your equity growth is minimal at first. If you look at an amortization schedule (and I highly recommend doing this before you buy), you’ll see just how much of your money is going toward interest early on. It’s eye-opening—but it’s also normal, and it’s important to understand this when you’re comparing rent-to-own options vs. traditional
But on the flip side, the 2nd half of your mortgage is usually where the majority of your equity is earned since most of those payments go to the principal.
So how does it work with a rent to own agreement?
When you do a lease option / rent to own home in Milwaukee there are various types of arrangements you can choose to take… but the most common is this:
- You find the rent to own house you like and apply
- You and the rent to own house owner agree on a monthly rent, a “move in” type fee that basically pays for the privilege to have the opportunity to purchase the home late, and the price of the purchase at the end of the rental agreement if you want to buy it.
- You move in and pay your monthly rental payment and treat the house great (since you may be owning it someday).
In the old days of lease options / rent to own agreements, a home owner was allowed to let a portion of the monthly rental payment be applied to the purchase price as a pre-paid down payment.
This was great for everyone!
It helped the tenant buyer earn money off of the purchase each month they made a payment… and it helped the house owner sell the house more often at the end of the rent to own agreement since now the tenant had some “equity” in the deal.
But in recent years, federal regulations—specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act—have changed the game when it comes to rent-to-own agreements. This law was designed to protect consumers in the housing market, and one effect has been tighter rules around how landlords and sellers can apply rent payments toward a future purchase. In many cases now, sellers are restricted from crediting monthly rent toward the down payment unless the tenant qualifies under certain lending guidelines. You can read more about this directly from the Consumer Financial Protection Bureau (CFPB). Always consult a real estate attorney or licensed financial advisor before signing any rent-to-own contract—especially in light of these legal changes.
But There Is Still Opportunity To Earn Equity With A Rent To Own Contract
One of the biggest advantages I’ve seen with rent-to-own homes here in Milwaukee is price lock-in. You and the seller agree on the purchase price before you move in—usually based on today’s market conditions. That means if the home’s value increases during your rental period, that extra value becomes your potential equity if you decide to buy. I’ve worked with several buyers who were able to walk into instant equity just because the neighborhood took off in value during their lease term. Of course, markets don’t always rise, so do your homework. I usually suggest checking the latest market trends and development plans with a local real estate agent before finalizing your contract price.
And the beauty is… if the market does really well during your rental term and the house goes up in value a lot… the seller can’t raise the price on you.
So whatever home value growth happened during your rental term over and above the sales price… that’s your equity!
Now, is there a guarantee that the value of the home will go up and you’ll earn equity?
No, but just make sure that when you’re negotiating the rent to own agreement that you really do a bit of research and see if the area the house is in has a good chance of increasing in value or not. Then base the purchase option price on that.
Before we wrap this article up… you may have the question of whether you HAVE TO buy the house at the end of the rental term.
The answer is no—you’re not legally required to buy the home at the end of your rent-to-own term. That’s one of the reasons people love this option: it gives you time to test out the home, the neighborhood, and your financial readiness before committing. If you reach the end of the lease and decide it’s not the right move (or your circumstances have changed), you can walk away. Just be aware that any upfront option fees or rent credits you’ve paid are typically non-refundable. I always recommend getting everything in writing and having the agreement reviewed by a real estate attorney—so you’re clear on the terms from day one.
If you’re looking to get more info about our local Milwaukee Rent To Own Homes Program… simply give us a phone call at (920) 851-9727 or fill out the form on this website to see our current LIST OF AVAILABLE RENT TO OWN HOMES here >>