Do You Have to Be Muslim to Get a Riba (Interest) Free Mortgage?
One of the greatest secrets in the mortgage world is that an interest-bearing loan is not the only way to finance a home. Islamic mortgages — a type of home financing that is actually not a loan at all — are structured in a different way that offers many benefits over a traditional mortgage. What even fewer people know is that this type of financing is not just for Muslims. Rather, it is available to anyone who is looking for a more just, equitable, and socially conscious method of buying their home.
What even fewer people know is that this type of financing is not just for Muslims. Rather, it is available to anyone who is looking for a more just, equitable, and socially conscious method of buying their home.
4 Reasons Why Islamic Mortgages Are Not Just for Muslims
1. Riba (Interest) Free Mortgages
Islamic home financing is free of riba, or interest. The customer still pays the company each month, but the contract is built on a completely different foundation — co-ownership. Rather than playing the role of a borrower with a huge loan as in a conventional mortgage, the customer buys the home in partnership with the financier.
Instead of paying interest, the homeowner’s monthly payment then consists of two elements: a profit payment and an acquisition payment. Together, these two amounts make up a predictable monthly payment that is competitive with the monthly payments offered in a conventional mortgage.
While the total payment may resemble that of a traditional mortgage, the foundation is entirely different, and that results in numerous benefits and protections for the homeowner.
>> Related Read – The Difference Between an Islamic Mortgage and a Conventional Mortgage
Let’s break it down further:
Instead of a traditional interest fee, Guidance Residential charges a profit payment for allowing the customer to use the company’s share of the home. This payment is based on a rate competitive with the market rates home buyers are familiar with. This charge is included in the regular monthly payment the customer will be responsible to pay.
The remaining portion of the monthly payment is the acquisition payment, which allows the customer to acquire an increasing share of ownership in the home. As the customer makes acquisition payments to acquire a further share in the property, Guidance’s ownership share decreases.
Read on for some of the benefits this different structure imparts.
2. No Prepayment Penalty
So, if you are still paying a comparable rate each month, what does it matter if the structure of the agreement is different? The answer is this: It makes a big difference–from the small payments that can add up, to the types of risks you face.
One example is that Guidance does not charge a prepayment penalty as banks have traditionally done for paying off a mortgage early.
Just like with a conventional mortgage, a Guidance customer enters into a contract of 15 or 30 years. But many customers eventually find that they are in a position to make extra payments, and they may choose to pay ahead of schedule in an effort to own their property in full early and be free from monthly payments.
>> Related Read – The Purpose of an LLC in Islamic Home Financing
Historically with a traditional mortgage, banks have often charged a prepayment penalty since early payments reduce the amount of interest they will receive. Guidance, however, charges no additional fees or penalties for buying out the company’s share of the property early.
Similarly, Guidance Residential caps late payment fees as well. In a conventional loan, a hefty late payment fee has traditionally served as a type of penalty as well as a source of income for the bank.
Guidance Residential, on the other hand, considers it unethical to benefit from a customer’s financial distress. The company charges only a small fixed late-payment fee to cover the administrative costs of contacting the customer about the missed payment.
3. Co-Ownership Model and Shared Risk
A conventional mortgage creates an unequal situation where one party (the bank) benefits at the expense of the other (the homeowner), who is indebted to pay interest over time. In Guidance Residential’s Declining Balance Co-Ownership Program, the customer and Guidance are co-owners, and that means they take part in risk sharing, as opposed to placing most or all of the risk on one party. The aim of risk sharing is to create more cooperative and equitable relationships.
>> Related Read – How Does a Co-Ownership Mortgage Work?
About Shared Risk
Natural Disaster and Eminent Domain: The risk is shared if the property is lost in the case of a natural disaster or a public service project (eminent domain) initiated by the government forces you out of the property.
When this happens, conventional loan providers will apply all of the proceeds to pay off the loan – solely protecting their own investment.
With Islamic mortgage provider Guidance Residential, on the other hand, proceeds provided by insurance or government are shared based upon the percentage of ownership at the point of the loss. If the proceeds are less than the purchase price of the home, Guidance shares the loss with the homeowner.
Foreclosure:This is something no one likes to think about. But in the case of extreme hardship, if a homeowner were to be unable to continue to pay for their home, foreclosure could be unavoidable and the home must be sold.
With a conventional mortgage, if the home sale doesn’t cover the amount owed on the home, in many states the bank or lender can and will come after the homeowner’s personal assets to make up the difference.
Principles of Islamic finance, on the other hand, deem it unethical to take anything more than the asset in the contract – in this case, the home. It the proceeds from the home’s sale do not cover our portion of the property, we do not pursue any other assets. The customer is better protected this way.
Transparency is emphasized in Islamic finance guidelines. Vague and overly uncertain contracts – which place the customer at a disadvantage – are prohibited.
The World Bank reported after the 2008 financial crisis that Islamic financial institutions and their customers were less affected due to their more transparent policies. Guidance Residential is proud to make its process and documentation as clear and transparent as possible. It’s a matter of faith for the company, and it benefits all customers, regardless of affiliation.
Gaining in Popularity
At a time when income inequality is prevalent and an increasing number of people — especially younger generations — are paying attention to issues of social justice, alternatives to traditional mortgages are gaining in popularity.
The foundations of the current financial system are built upon debt and interest, and it is common to see transactions that are not backed by any tangible asset. This system can easily create increasing socio-economic inequality as well as widespread instability, in which bubbles grow and burst, and many people are affected by inflation, unemployment, and devastating financial losses.
Seeing these scenarios play out, more people are becoming aware of the effects of everyday choices and are looking to make positive changes in daily life. One way is by finding alternatives to traditional mortgage loans.
This explains why Islamic financing are increasingly appealing to people looking for more equitable and sustainable alternatives.
The #1 U.S. Islamic Home Finance Option
Guidance Residential offers a truly authentic Islamic mortgage alternative that is based on an entirely different foundation from a mortgage loan.
It is not a loan at all; rather, it is a co-ownership arrangement. This asset-backed transaction model follows Islamic principles of sharing profit and loss (although the homeowner retains all profit when the house is sold in this particular contract). Customers increasingly recognize that this is a model that is better for both the individual and the broader society.
If a more equitable co-ownership relationship with greater protections sounds good to you, a Guidance Residential expert would be happy to help you explore your options for home financing.
>> Take the first step by applying online, or give us a call at 1.866.Guidance with any questions.
Originally published in December 2020, updated October 2023.