Islamic Mortgage Rates: Is Islamic Finance More Expensive than a Conventional Loan?
Comparing Islamic Mortgage Rates with Conventional Financing
One of the common misconceptions among potential homeowners is that Islamic financing is too expensive compared to conventional financing – which couldn’t be further from the truth.
It is the case that a decade or two ago, Islamic financing was more expensive, as pioneers in U.S. Islamic finance created an authentic Shariah-compliant alternative to a mortgage and worked through U.S. regulatory processes and approvals.
But now, home buyers don’t have to choose between their finances and their values. Home buyers can find Shariah-compliant home finance options that are not only competitively priced but even offer additional financial advantages. It’s a win-win.
Islamic home financing is not more expensive
As the #1 U.S. provider of Islamic home finance, Guidance Residential has not only made it its mission to offer a Shariah-compliant alternative to a mortgage, but also to provide it at a competitive price that makes it an affordable option.
How Islamic Home Finance Companies Benchmark their Rates
Islamic financing is not a mortgage loan — it is based on a completely different foundation. Despite that, Islamic home financiers typically benchmark their rates with the prevailing mortgage rates in the United States. This is done partly to make it easy for consumers to comparison shop as they look for the right home financing. It is not riba, as no loan is involved. Guidance Residential have examined this method of calculating a profit and found it to be completely Shariah-compliant.
It’s also important to note that any financing in the United States has to follow governmental rules and regulations. So Islamic financing will look similar externally to a mortgage. Again, however, under that surface, it’s a completely different product. Comparing Islamic financing with a mortgage loan is like examining two different cakes with similar icing on top. At Guidance Residential, our cake is halal.
Why Choose Islamic Financing vs Conventional Mortgage
Guidance Residential’s customers choose Islamic home finance for many reasons. The first is that it matches their values.
The biggest dilemma facing American Muslim home buyers is that the Islamic faith prohibits the use of riba, or interest, and that is what a conventional home loan depends upon. In Islam, a loan is meant to be a charitable act, and the lender should not profit from it. So a home finance model based on profiting from a loan is not acceptable, especially if an alternative is available.
Guidance Residential was founded as a solution to this problem. Our alternative to a mortgage loan was developed with the help of six top scholars of Islamic finance, and it’s completely free of riba, or interest. This model is built on the Islamic financial concept of musharakah, or co-ownership. It is not a loan at all, but rather a joint purchase. After the home is purchased, the homeowner gradually buys out our share of the home over the course of their contract. An independent Shariah board continues to monitor Guidance Residential’s services to ensure that everything remains completely Islamically sound and authentic.
Because of this foundation, Islamic home finance is also significantly more just and equitable than a traditional mortgage, which makes it appeal to home buyers of other faiths as well. Guidance Residential is not a lender, but rather a partner with the homeowner. The company is happily bound to rules of morality, such as capping fees and assuming some of the financial risks as appropriate with a joint venture. The more closely people examine this co-ownership model, the more appealing they tend to find it.
When it comes to home financing, Guidance Residential’s focus is authenticity and integrity– not only because homeowners already have enough to cope with financially, but also because it’s the right way to conduct business.
Avoid hidden fees by choosing Islamic financing
Traditional mortgages have historically been associated with fees that can end up increasing a home buyer’s costs in unexpected ways. With a conventional mortgage, for example, if a homeowner is unable to pay their bill on time, they are charged a late penalty, up to an additional 5%. On a $2,500 mortgage, that could mean an extra $125 in late payment fees. Part of that covers administrative expenses, while the rest is profit from the customer’s difficulties. Fees like these can hide behind low up-front costs, hurting customers when they’re already struggling. Guidance Residential, on the other hand, charges only a small fixed fee to cover the administrative expenses associated with a late payment. Islamic guidelines discourage profiting from someone else’s distress.
Some lenders also charge a fee if a home buyer makes extra payments to pay off the home early. Guidance Residential does not charge this prepayment penalty either.
As a broader principle, Islamic financial laws require all costs to be disclosed, so home buyers can rest assured that all fees are transparent up front.
Calculate the Cost of Home Financing with Guidance Residential
You can also instantly calculate an estimate specific to your personal situation with our finance calculators online.
Connect with Guidance Residential Today
Choosing an option for home finance can be daunting. Fortunately, our expert Account Executives are there to help! Contact us and a Guidance Residential Account Executive would be happy to answer any questions you may have.
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Originally published in June 2013. Updated in June 2021.