There’s a none profit HUD approved mortgage company named Neighborhood Assistance Corporation of America, www.naca.com. They offer homeownership program with Buy–Down interest option to permanently eliminate interest. Unprecedented buy-down to virtually 0%. For example, a 15 year mortgage in the amount of $250,000 at 2.75% interest rate, $17,500 for the interest buy down will permanently eliminate interest. The $17,500 is not a down payment; it only eliminates interest permanently. The principal loan is still $250,000 until you make your first mortgage payment. Monthly payment will be principle plus property tax plus insurance. No interest payment.
Is an upfront Interest Rate Buy down permissible? The Buy Down money is due at the day of closing and it’s only one time payment. One percent of the mortgage amount reduces interest rate by one quarter of a percent (.25% for 30 year mortgages and by half a percent (.50%) for 15 year mortgages. Please advise and let me know if you need more information.
In principal, it is permissible to increase the price of a product when sold on installments as opposed to fully paid on spot as long as the payment terms are fixed and do not fluctuate with the time of repayment. If the interest that was going to be paid over time is included in the final purchase price and the buyer and seller agree to such terms of sale then it would be permissible to buy the hosue in such a manner. The issue in buying down interest as you have described in your question is that you are still paying the interest. The only difference is that in this case all the interest is paid upfront and in a standard agreement, interest is paid over time. If the interest amount were to be included in the final purchase amount of the house and then for instance $17500 was considered a down payment for the house, theoratically then it would be considered a permissible scenario.
And Allah knows best.
Mufti Ikram ul Haq
Fatwa Center of America