Is a Buy-Back Option a Way Around Ribbis?

Rav Yosef Dovid Josilowsky, Dayan at the Bais HaVaad

Case: I bought a house many years ago. Since I was unable to get a mortgage on my own, my friend agreed to let me put the house under his name. I paid up the mortgage on the house and now it is free and clear. I would now like to do a cash-back refinance to get some liquid money to use for other things. 

I heard that Rav Moshe Feinstein permits buying a house without a heter iska if it is set up as a lease-to-own agreement, meaning that we agree that the principal of the loan will be paid up in the end and the payments I give now will be considered rent, rather than interest.

Question: Can this solution be used in this case?

Answer: Rav Moshe does say that a lease to purchase agreement is permitted without a heter iska if it is set up in this way; however, there are limits to this heter and it may not apply in this case. 

If one buys a house in someone else’s name, the other person could be viewed as the real purchaser. If we look at him as the owner, it could be said that the original person is slowly buying the house back from him with every payment, and all the “interest” he is paying is actually rent that allows him to live in the house. 

In a case where one owns the house already, however, refinancing is essentially selling it back to the “lender,” and he will now have to buy it back from him. A case where someone sells something with a buy-back option is usually viewed by the Gemara as a loan, not a sale, and extra payments would be considered ribbis, rather than rent. 

In other words, if one sells an item and makes up with the buyer that he retains the right to buy it back retroactively anytime he wishes, the Gemara considers that a loan, rather than a sale. Therefore, it would be forbidden to pay more when buying back the item than what was originally paid, as that would constitute ribbis on the loan. If the item sold was a house, any rent one paid to live in the house would actually be considered ribbis.   

The case in question, therefore, would be an issue of ribbis. 

The truth is, in cases where a sale is made with a buy-back option, there is a potential solution. It could be set up as a real and complete sale, with the condition that should he decide to buy back the house, the buyer is required to sell it back at that time as a new sale. If it is done in this way, some Poskim permit paying rent while living in the house because the house belongs entirely to the buyer, and he is now paying rent to the owner. If one ends up buying it back, it would be considered a new sale. 

In this case, however, he is giving money directly to the lender while he still owes money. The Gemara forbids transactions like this because it has the appearance of paying ribbis, so this solution to permit rent payments would not apply in such a case. 

In any event, it seems clear that the best option would be to use a heter iska.