Islamic Mortgage vs Conventional Mortgage: What You Should Know About Ethical Financing Options
If you’ve been searching for a way to buy a home without compromising your values, you’ve probably come across the term Islamic mortgage or Islamic house mortgage. At first glance, it may seem like just another type of loan — but in reality, it’s something very different. Unlike a traditional mortgage that involves interest (riba), Islamic home financing is built on principles of shared ownership, ethical investing, and fairness.
In this blog, we’ll explain how Islamic home financing works, how it differs from a conventional mortgage, and why more homebuyers are exploring this shariah-compliant alternative as a path to homeownership.
Traditional Mortgage vs Islamic Mortgage in the USA
When you take out a traditional loan, you’re essentially renting money (which compounds interest). The bank profits from the deal (even if you face hardship), putting all the risk on you.
With Islamic financing, you aren’t just a borrower; you become an investment partner.
Instead of paying interest, you gradually buy the home through a shared-ownership model. This agreement balances risk and responsibility. It also means:
- No compounding penalties if you miss a payment.
- No profit made from your setbacks.
- No interest charges that conflict with your values.
It’s an ethical mortgage alternative built on fairness, transparency, and trust.
How Mortgages Work
While a halal mortgage might look similar to a conventional one on the outside, they are structured differently.
A traditional mortgage works this way:
You decide to buy a home. A mortgage company gives you a loan—basically selling you money for more money. You pay them back every month. Part of your payment goes toward what you owe for the house, and another part (the biggest part) is the interest you pay the mortgage company for the loan.
In this scenario, you take on 100% of the burden and 100% of the risk. If you fall victim to a natural disaster or eminent domain, you’re left to deal with it on your own. If you lose a job and miss a payment, the mortgage company charges you compounding fees, profiting off of your difficulties. Eventually, they’ll take the home, leaving you with nothing.
If, on the other hand, you find that you can pay extra to save on interest, they may charge you a penalty for paying them early.
Islamic home financing works differently.
Guidance Residential’s model works like this:
You decide to buy a home. Guidance buys it with you. You co-own the house with us.
Every month, you pay a certain amount to Guidance to buy a little more of the house from us. You also pay a usage fee each month (similar to a rental fee) for full usage of the home since you are the one who is actually using the house — you’re living in it. Both of these fees are combined into one monthly payment.
Over time, you buy out Guidance Residential’s stake in the house, and it is yours alone.
In this scenario, we are sharing the burden with you AND sharing the risk.
- If you miss a payment, we don’t profit from your difficulties. Guidance charges a small fee to cover the administrative cost of sending reminders, but it never compounds.
- In the event of default, when the home is sold, Guidance will only reclaim our share.
- In the event of a natural disaster or eminent domain, Guidance will share the loss in proportion to our ownership stake.
And you can buy out Guidance’s shares at any time without a prepayment penalty.
In one sense, the two home financing approaches look similar, because you are making a payment each month in return for a house. But the mechanism is very different.
“They have nothing to lose — they get every benefit
you get in the conventional banking system, plus unique benefits.
We share [the risks]. These are unique benefits
that nobody else offers in America.”
— Senior Vice President Salman Ali,
Guidance Residential
Want to Learn More About Islamic Mortgages and How They Work?
Explore the details behind halal home financing, co-ownership models, and how ethical mortgage alternatives can align with your values. Read: What Is an Islamic Mortgage and How Does It Work?
Get answers to the most commonly asked questions about Islamic mortgages and refinancing. Read: 10 Common Questions about Buying a House the Halal Way.
Take the Next Step on Your Homebuying Journey
Guidance Residential’s co-ownership model of Islamic home financing remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years.
Learn more about Islamic finance, or get started on your homeownership journey today!
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today.
Originally published in April 2019, last updated in October 2025.
