4 Different Kinds of Islamic Mortgages

Islamic mortgage loans strictly follow the rules set by Islam. As a result, these loans do not charge for interest. Here are four kinds of Islamic mortgages.

1. Ijarah or Ijara

This type of home loan is similar to the lease-to-own concept. The borrower signs a lease agreement with the loan provider which, in turn, will buy the property that the borrower wants to acquire. Under the contract, the borrower has the right to occupy the property and the obligation to provide regular payments, including rent and partial payment for the property. After the purchase price is completely paid, the title will be passed to the borrower and the rental payment will cease.

2.  Musharaka

This is very similar to the Ijarah mortgage. The only difference is that the first payment to the lender will serve as the borrower’s partial ownership in the house. In this type of mortgage, the equity of the lender in the property diminishes as the borrower pays monthly payments consisting of the rent and capital outlay of the lender. When payment is completed, the borrower gets 100 percent ownership of the property.

3. Murabaha

This is similar to Ijara and Musharaka except for the fact that the borrower does not pay rent for the property. Instead, the lender makes money by reselling the property to the borrower at a higher price. The borrower gets the title of the property after full payment of the agreed purchase price.

4. Istisna’a

This is a construction finance mortgage. The borrower only starts to make payments after the construction of the property or home is done.