Is Islamic Finance More Expensive Than a Conventional Mortgage?
Some people are under the impression that Islamic finance is more expensive than conventional home loans. In the past, this once held true; however, it has been relegated to a myth in recent years as Islamic financing has become relatively cheaper.
Halal mortgages are now competitively priced to traditional mortgages. Guidance Residential, the #1 U.S. Islamic home financing provider, has financed more than 40,000 homes over 25 years.
How Does the Cost of Islamic Home Financing Compare to a Traditional Loan?
Guidance Residential’s Declining Balance Co-ownership Program is structured differently than a traditional mortgage. It is not a loan: You and Guidance purchase the home together, and your monthly payments gradually shift Guidance’s share to you until you own the home outright.
While halal mortgages offer multiple advantages over a traditional home loan, the costs are comparable. Islamic home financing once came at a higher price compared to a traditional mortgage, but this is no longer the case.
As the Islamic home finance industry has grown in the United States, Islamic financiers have been able to lower the cost, so the cost is now comparable to the interest rates used for a traditional mortgage.
What Do Islamic Financing Rates Look Like in the United States?
Islamic mortgage providers typically benchmark their rates with the current mortgage rates in the United States. This helps consumers compare their options.
How Does This Differ From Riba?
Some people misunderstand the external resemblance between mortgage rates and Islamic mortgage rates. They ask: Doesn’t this mean that halal mortgages are just riba under a different name?
They’re not. The profit rate is benchmarked against conventional rates so buyers can comparison shop, but the payment itself buys real ownership rather than charging for borrowed money, and Guidance’s independent Shariah Board has reviewed and approved this method of calculating profit.
The end result is that halal mortgages are now competitively priced compared to conventional mortgages. A halal mortgage has become an affordable option for those who wish to achieve homeownership without compromising their beliefs and principles.
What Does the Monthly Payment Consist Of?
At Guidance Residential, monthly payments consist of two portions that are combined into one.
- The first portion goes toward buying Guidance’s share of the property.
- The other portion compensates Guidance for the homeowner’s use of the financier’s portion of the property.
In this way, the homeowner retains full and exclusive rights to use the property while gradually increasing the share they own until have fully paid off the home and own it outright.
Are There Extra Fees or Penalties to Worry About?
Islamic mortgages may have fewer and lower fees, actually. Guidance doesn’t calculate late fees as a percentage of your payment the way some conventional lenders do. Instead, you pay a smaller, fixed fee that only covers the administrative cost of collecting a late payment.
Guidance also doesn’t charge a prepayment penalty, so you’re free to pay off your home early.
What Up-Front Expenses Should I Expect When Buying a Home?
No matter how you finance a home, the financial commitment will be similar. The largest up-front cost is the down payment.
In Islamic financing, the home buyer and the financier purchase the home together, each owning a portion of the home corresponding to the proportion each party contributes.
Down Payment
Ideally, the home buyer pays a down payment of 20% or more of the home’s purchase price. For a $300,000 home, this would mean a down payment of $60,000. Guidance Residential, however, may permit the home buyer to contribute as little as 5% of the purchase price, or $15,000 on that $300,000 home. For first-time home buyers, there are programs available that accept as little as 3% down.
Closing Costs
In addition to the down payment, the buyer is responsible to pay closing costs at the home’s closing. This covers property taxes, home appraisal fees, homeowner’s insurance and mortgage insurance, and fees for other professionals who performed services for your transaction.
Closing costs typically equal 3% to 5% of the amount you are financing. For that $300,000 home, if you are financing $240,000 after your down payment, your closing costs could be $7,200 to $12,000.
Frequently Asked Questions
Will I pay more in total over the life of an Islamic financing contract than a conventional mortgage?
It should be about the same. Guidance benchmarks its profit rate against prevailing conventional mortgage rates, so total costs are generally comparable over the life of the contract, and you keep all appreciation in the home’s value when you sell.
Why did Islamic financing used to cost more, and what changed?
As the Islamic finance industry grew in the U.S., providers gained the scale needed to lower their rates, bringing costs in line with conventional mortgages.
Can I pay off my contract early to save money?
Yes. Guidance doesn’t charge a prepayment penalty, so making extra acquisition payments reduces the total usage fee you’d otherwise pay over the life of the contract.
Are closing costs different for Islamic home financing?
No. Closing costs cover the same items, property taxes, appraisal fees, insurance, and other professional fees, and typically run the same 3% to 5% of the financed amount as a conventional purchase.
Start Your Home-Buying Journey
A home purchase is one of the most important decisions you will make. The team at Guidance Residential is here for you, from the first step of pre-qualification or pre-approval, on through to finding the right real estate professional for you and your family — or refinancing a home you already own. We invite you to explore the home buying process with Guidance Residential today. You can also instantly calculate an estimate specific to your personal situation with our finance calculators online.
Guidance Residential remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over 25 years. Learn more about our co-ownership model of Islamic home financing, and get started on your home finance 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 2017, updated July 2026.
