The Costs of Standard and Lease-Purchase Mortgages Compared

A lease-purchase mortgage is a mortgage that combines features of a lease-purchase contract and a conventional mortgage. They are sold by both government-run mortgage lenders (Fannie Mae and Freddie Mac) and private mortgage lenders. Compared to traditional mortgage loans, the lease-purchase mortgages are easier to qualify for, and initial payments are lower. However, the lease-to-purchase mortgage may wind up costing you more in the long run. That is why it is important that you understand exactly what you are getting into before you decide whether to get a traditional mortgage or a lease-purchase mortgage.

How a Lease-Purchase Mortgage Works

The lease-purchase mortgage is divided into two parts: the lease portion and the mortgage portion. The first portion usually lasts about three years (give or take a few months). During that time, you live at the home you are buying as a renter. The rent you pay is used to cover the monthly mortgage costs. If you make all your monthly payments on time and pay in full during the course of the lease period, you move on to the mortgage stage. This is when you take on full responsibility for the mortgage, and you are responsible for paying it off the way you would a standard mortgage.

Initial Mortgage Costs

When you buy a standard mortgage, you will have to make a down payment and pay the closing costs. The closing costs allow the mortgage lender to cover the costs of preparing your mortgage. Different mortgage lenders have several different types of closing fees, but only four of them are absolutely necessary--attorney fees, title fees, government recording fees and pre-paid fees. The rest are entirely optional and are charged at a lender's discretion. In fact, you can easily find lenders whose closing costs are composed entirely of the necessary fees.

When you buy a lease-purchase mortgage, you don't make a down payment or pay closing costs. However, you will be charged a commitment fee, which will equal 1 percent of the property's value. You will also be charged an application fee and the credit renewal fee. Generally speaking, the standard mortgage carries bigger initial costs than does a lease-purchase mortgage.

Monthly Mortgage Costs

Both standard and lease-purchase mortgages require you to make monthly payments. In the case of a lease-purchase mortgage, the payments are included in monthly rents for the duration of the lease portion. These monthly payments include principal (the portion of the value of the mortgage), interest, real estate taxes and insurance costs.

Interests can be either fixed or variable. If they are fixed, the interest rates stay the same until the loan is fully repaid. If they are variable, they shift based on the market conditions. In the current market, the former is more affordable, but this may change in the future.

Generally speaking, the interest rates tend to be higher on lease-purchase mortgages than they are on standard mortgages. Furthermore, the lease tends to take longer to be repaid, which means that, in practice, you may wind up paying more overall. If you have a lease-purchase mortgage, you are required to pay a monthly lease servicing and property management fee. However, once you enter the mortgage phase, those fees drop in value until they vanish altogether.