Islamic Home Financing Calculator

Compare Sharia-compliant partnership financing (Diminishing Musharaka) with conventional interest-based mortgages.

Property Details
Financing Options

Understanding Financing Rates

Conventional Interest (%) is the annual interest rate charged by traditional banks on mortgage loans. This is riba (interest) - money charged for the use of money, which is prohibited in Islamic finance.

Annual Rental Rate (%) is NOT interest. It represents the estimated fair market rental rate for the property, used to calculate rent payments on the partner's ownership share in halal financing. This rate is subject to fair market value assessment and reflects payment for the use of an asset (the property), not money.

Key Difference: Interest (riba) is payment for the use of money, while rent is payment for the use of a physical asset. In halal financing, you pay rent on the partner's share of the property, which is permissible in Islamic law. The rental rate should reflect what the property would rent for in the open market.
Buyout & Rent

Understanding Buyout & Rent

Monthly Buyout ($) is the amount you pay each month to purchase the partner's ownership share of the property. This is the principal repayment component in halal financing. As you make buyout payments, your ownership percentage increases while the partner's decreases.

Fair Market Rent ($) is automatically calculated based on the home price and annual rental rate. It represents the estimated monthly rent for the entire property at fair market value. This is a reference value showing what the property would rent for in the open market.

How It Works: In diminishing musharaka, you pay rent on the partner's share of the property (which decreases over time) plus a monthly buyout to gradually acquire full ownership. The rent component decreases as the partner's ownership decreases, while your buyout payments increase your equity.
Property Costs

Understanding Property Costs

Annual Property Tax (%) is the annual property tax rate based on your home's assessed value. Property taxes are typically 0.5% to 2% of home value, varying by location. These taxes grow with home appreciation over time.

Annual Insurance (%) is the annual homeowners insurance rate, typically 0.25% to 0.5% of home value. Insurance protects against property damage and liability, and costs also increase as the home value appreciates.

Conventional Loans (Escrow): In U.S. conventional mortgages, insurance and property tax are typically collected through an escrow account. The lender estimates annual costs, divides by 12, and adds this amount to your monthly payment (PITI = Principal + Interest + Taxes + Insurance). This creates equal monthly payments, even though actual insurance and tax costs increase with property appreciation. The escrow account is recalculated annually, but your monthly payment stays constant until the next adjustment.

Halal Financing (Proportional): In halal financing, insurance and property tax are split proportionally based on ownership - you pay your share based on your ownership percentage, and the partner pays their share. As your ownership increases, your share of these costs increases proportionally. This reflects the fair sharing of property expenses in a partnership structure.
YoY Appreciation

Understanding YoY Appreciation

Rent Growth (%) represents the annual increase in rental rates due to market inflation and rent adjustments. This affects the monthly rent you pay on the partner's share of the property.

Home Growth (%) represents the annual appreciation of the property value. This is used only for projection purposes to estimate your net gain at the end of the term.

These are separate concepts: rent growth affects your monthly payments, while home growth affects your final equity position. Neither represents riba (interest) - rent is payment for use of an asset, and property appreciation reflects real asset value changes.
Financing Comparison

Frequently Asked Questions

What is Diminishing Musharaka and how does it differ from a conventional mortgage?

Diminishing Musharaka is a Sharia-compliant partnership financing structure where you and the financial institution co-own the property. You pay rent on the institution's share and gradually buy out their ownership through monthly buyout payments.

Unlike a conventional mortgage (which is a loan with interest), this is a true partnership where both parties share ownership and expenses proportionally. As your ownership increases, your share of expenses increases, and rent decreases.

Is Islamic home financing just interest with a different name?

No. Interest (riba) is payment for the use of money, which is prohibited in Islam. In Diminishing Musharaka, you pay rent for the use of a physical asset (the property), which is permissible.

The rental rate must reflect fair market value , not be disguised interest. The key difference: interest is payment for money, rent is payment for an asset.

Why is rent allowed in Islam but interest is not?

Islamic law distinguishes between riba (interest on money) and rent (payment for use of an asset).

Riba is prohibited because money has no intrinsic value - charging for its use creates wealth without productive activity. This is considered exploitative.

Rent is allowed because you're paying for the use of a real asset (property) that has value and can generate benefit. The rental rate must reflect fair market value, ensuring it's not disguised interest.

Is Islamic home financing more expensive than conventional mortgages?

Costs vary based on rental rates, buyout terms, and market conditions. In some cases, halal financing can be competitive or even more cost-effective, especially when considering:

  • Ownership structure and shared expenses
  • No prepayment penalties (typically)
  • Proportional cost sharing (insurance, property tax)

Use this calculator to compare total costs, payments, and net gain for your specific scenario.

What happens if I can't make payments in Diminishing Musharaka?

The terms depend on your specific contract, but typically the institution may exercise rights as a co-owner, such as selling the property and distributing proceeds based on ownership percentages.

This differs from foreclosure in conventional mortgages, as both parties have ownership rights. Always review your specific contract terms and consult with your financial institution.

Can I pay off my Islamic home financing early?

Yes, you can typically buy out the institution's remaining share at any time. Unlike conventional mortgages that may have prepayment penalties, early buyout in Diminishing Musharaka simply accelerates your ownership acquisition.

Check your specific contract for any terms, conditions, or procedures for early buyout.

How is ownership shared in Diminishing Musharaka?

Ownership is proportional to each party's investment. If you put down 20% and the institution provides 80%, you own 20% and they own 80% initially.

As you make buyout payments, your ownership increases and theirs decreases. Expenses (insurance, property tax) are also shared proportionally based on ownership percentages. This reflects the fair sharing principle in Islamic partnerships.

Is Diminishing Musharaka really halal and approved by Islamic scholars?

Yes, Diminishing Musharaka is widely accepted by Islamic scholars as a Sharia-compliant alternative to interest-based mortgages.

It's based on the principles of Musharaka (partnership) and Ijarah (leasing), both recognized as valid Islamic finance structures. However, implementation details matter - the rental rate must reflect fair market value, not disguised interest.

Always verify that your financial institution's implementation follows proper Sharia guidelines and has appropriate scholarly oversight.