By Peter G. Miller
Ask someone to define the "American Dream" and you'll soon be talking about home ownership. But with a little prompting, the real dream is not just ownership, it's also interest-free financing.
The biggest purchase most people make is not a home -- it's the interest cost required to finance the property. Buy a $100,000 home at 7.5 percent interest with no money down and over 30 years you'll run up an interest bill of $151,712.
Not only is interest expensive, there are those who believe that charging interest violates religious principles, a perspective which raises an intriguing question: If one agrees that as a matter of faith interest should not be charged or paid, how is it possible to buy a home?
One approach is offered by Habitat for Humanity
. Habitat, a nonprofit, ecumenical Christian organization, builds homes for low-income households with volunteer labor (including sweat equity from future owners), sells the homes at cost, and finances each purchase with a no-interest loan.
Habitat founder and President Millard Fuller, as the group explains
, says that "we may disagree on all sorts of other things... but we can agree on the idea of building homes with God's people in need, and in doing so using biblical economics: no profit and no interest." (See, as an example in the Old Testament, Exodus 22:25)
Go back to that $100,000 home. If it could be financed with a $100,000 loan that carried no interest, the cost over 30 years would be, well, $100,000. There would be no interest cost -- a saving of more than $150,000 -- and the monthly expense for principal would be just $277.78. That's a savings of more than $400 a month.
The catch is that $100,000 is far more than most Habitat homes cost to construct. In Americus, GA, for example, a home with three bedrooms, an eat-in kitchen, utility area, and full bath sells for about $32,000 under the Habitat program. Over 20 years, that's about $134 a month in mortgage costs.
Habitat has created 80,000 home ownership opportunities worldwide with no-interest financing, and it is not alone: Islamic law also bans the payment of interest.
Under Islamic law, the Sharia'a, usury or interest ("riba") are not allowed, according to Manzil USA, the home acquisition program of Al-Manzil Islamic Financial Services, a part of The United Bank of Kuwait PLC.
Rather than an interest-bearing loan, Al-Manzil instead offers a net lease. It works this way: You pick the house you like, Al-Manzil buys it, and you rent it.
The monthly payment includes rent, taxes, insurance, as well as "a contribution toward your purchase of the property," says Al-Manzil. "We call this your payment on-account. The contributions on-account function like an amana (or trust). It is not a deposit account, but rather an imputed equity account that grows and provides more financial benefit than renting alone."
The rental is exclusive, and Al-Manzil cannot sell the home as long as the lease is maintained. Tenants can sell the home at any time, and at the end of the lease period they may obtain title for $1. Lease periods from 15 to 30 years are available. The lease requires a 1 percent fee up front for a new loan, .5 percent for refinancing. Refinancing can include converting from an interest-bearing loan to the Al-Manzil program.
There are no pre-payment penalties, and the tenant receives all profit if the property rises in value and is sold. Alternatively, if the property's value declines, then -- as I see the program -- Al-Manzil's capital can be at risk.
A portion of the monthly payment, says Al-Manzil, is tax deductible, a matter which should be discussed with a tax professional.
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© Copyright 1999 by Realty Times. All Rights Reserved.