Alternative home buying methods for Muslims re interest

I wonder if this method of home mortgage payments will have the same tax benefits as those paying interest?

BumbleBeeboogie
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Companies Devise Financing Alternatives for Muslim Home Buyers Prohibited From Paying Interest
By Wayne Parry Associated Press Writer
Published: Aug 2, 2003

CLIFTON, N.J. (AP) - For more than a decade, Daoud Othman and his family have rented a small apartment and dreamed of owning a home with a yard for the children to play in.
Othman thought about applying for a mortgage from a bank, but as a devout Palestinian Muslim he couldn't, bound by a prohibition in the Quran against paying interest.

But now, Othman and many others like him are joining the ranks of homeowners using special Islam-approved financing, a fast-growing phenomenon that has been common in Muslim nations for years, but is only now catching on in this country.

"I've been wanting to get a home, but I wanted to do it the right way," said Othman, who owns a heating and air conditioning business and came to the United States 14 years ago. "It's not easy because everyone offers mortgages with interest, and I refuse to do that."

Instead, Othman entered into an investment contract with a Virginia-based financing company, Guidance Financial Group, under which they will jointly own the three-bedroom ranch he is buying for $270,000. He put $70,000 down, and will gradually pay off the balance over 30 years.

Basically, Othman will pay the company rent on the portion of the house it owns, as well as some on top of that to gradually buy out Guidance's ownership. Because the payments are considered rent on a tangible property, and not simple interest on borrowed money, the transaction is permissible.

Sharia, or Islamic law, prohibits interest, but permits profit on a business venture involving a tangible asset, according to Islamic scholars.

"It looks like interest, but they call it profit," Othman said. "It's a co-ownership. They own the house with me, and it's like they're renting part of it to me."

The homeowner is responsible for paying taxes and insurance. All told, Othman's monthly payment will be between $1,500 and $1,600, about the same as if he had taken out a conventional mortgage from a bank. Over time, Othman's equity in the house will increase as Guidance's decreases, and after 30 years, he will be the sole owner.

Yahia Abdul-Rahman is the founder of American Finance House-LARIBA, a Pasadena, Calif., company that offers Islamic financing. He said his company has closed more than 1,000 contracts with clients in 34 states since 1987.

"If you come to me and say, 'I want to finance a house, what is the interest rate of the day?' we do not believe in interest. We believe in rent," he said. "We are going into a joint relationship to buy that house, and you buy shares back from us over 20 or 30 years."

The rent is based on what the property can lease for on the open market.

With its numbers in the United States estimated from 1.2 million to 6 million, the Muslim community offers a large untapped market for home financing, even though not all Muslims shun conventional mortgages. Freddie Mac, the government-sponsored home financing giant, is investing in mortgages from several Islamic companies.

"This is a group that is growing at a very quick pace," said Brad German, a spokesman for Freddie Mac, which invested $1 million in American Finance contracts in 2001, and has since put $100 million into similar deals. "Because of the religious requirements of Sharia, they're obviously having a difficult time becoming homeowners. This serves a very important need."

Muslims in the United States are estimated to spend $10 billion to $12 billion a year on goods and services, according to Nihad Awad, executive director of the Council on American-Islamic Relations.

Mortgages aren't the only transactions being marketed to Muslims. Car loans and even stock market investments are being tailored to meet the needs of Islamic buyers. Dow Jones & Co. offers an Islamic market index, a group of stocks that don't invest in companies that sell alcohol, tobacco, or pork. It also shuns conventional interest-charging banks.

Many of the Muslims who buy homes under the no-interest pacts still file for and get the mortgage interest deduction on their tax returns, calculating the rent and buy-out payments as the equivalent of interest. The IRS has not taken a position on whether such deductions are permissible, spokesman Bruce Friedland said.

In the meantime, Othman is eagerly looking forward to moving into his house late this month on a tree-lined cul-de-sac.

"It's the American dream," he said. "Actually, my dream was to buy a farm in Pennsylvania, but this is a nice dream, too."
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On the Net:
http://www.guidancefinancialgroup.com

http://www.americanfinance.com/LARIBAIslamicMortgagesTheMarket.h tm