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Cryptocurrencies are steadily becoming mainstream as several financial institutions, including mortgage lenders, continue to include services that consider crypto investors. This is because many individuals of the younger generations currently entering the home-buying market carry an enormous amount of their assets in crypto.
With the crypto mortgage concept, investors can now leverage the crypto wealth accumulated over the years to buy new homes. This also makes sense since raising funds needed to meet traditional mortgage requirements might be challenging.
However, since this is a new service, it is important to learn about its workings and risks. This article will give you concrete reasons to consider taking a crypto mortgage while also explaining what a crypto mortgage is, how it works and the risks involved.
What are Crypto Mortgages?
A crypto mortgage is a loan arrangement where you can deposit your crypto holdings as collateral to get funding for building or buying real estate without liquidating your assets.
Typically, a mortgage allows you to buy real estate without paying the full price at the time of purchase. You simply enter an agreement with a lender to supply the necessary funding, which you'll repay over a specified period of time.
The traditional mortgage agreement requires a down payment, credit history checks, and a rigorous underwriting process. After securing the loan and house, the borrower then repays the principal loan plus interest over several years till it is cleared.
However, crypto mortgages allow borrowers to take out such home loans using cryptocurrency as collateral while avoiding the rigorous processes and requirements. This type of mortgage specifically targets investors who do not intend to sell off their crypto holdings but need to buy a house.
How Does Crypto Mortgage Work?
Crypto mortgages work similarly to traditional mortgages except for the collateral requirement. When you apply for a crypto mortgage, the lender will check your digital asset holdings to determine how much loan you can get.
After deciding how much you can borrow and the annual interest rate, you'll be required to pledge a specific amount of your crypto assets as collateral. Some lenders like Figure will offer a 100% loan-to-value ratio if you meet certain criteria. This means that the collateral will equal the exact loan amount.
When you secure the loan and purchase the house, you start repaying the loan in a selected cryptocurrency or fiat currency. The lending platform requires you to make monthly installments over a pre-determined period.
The crypto mortgage option is ideal for individuals or crypto enthusiasts who have built wealth mainly in digital assets and are reluctant to sell off their investments.
Reasons To Consider Getting A Crypto Mortgage
There are certain reasons why a crypto mortgage might serve your home loan needs. If you have an enormous amount of your finances in crypto and looking to buy a new home, consider getting a crypto mortgage for the following reasons:
- No Need To Liquidate Your Digital Assets
The first and the most important reason to take out a crypto mortgage is that you get to keep your crypto holdings. If your investment plan is to hold unto your assets for several years, a crypto mortgage will not deprive you of this privilege.
Crypto mortgage lenders eliminate the need to liquidate your crypto holdings for a loan down payment. Instead, you can simply pledge your crypto as collateral which the lender will release to you after you repay the loan and the interest accrued.
- No Credit Score Is Required
Many lenders do not require you to have good credit histories to access loans and good rates. The process is based mainly on the size of your crypto portfolio rather than your credit score. You can borrow as much funds as your crypto assets can cover.
Although this is quite advantageous, there is a caveat. Some platforms may check your credit score before approving your loan.
- Take Advantage Of Potential Price Gains
The crypto market is volatile, which means that the market value of your assets can grow while it is still locked away with your mortgage lender. Most crypto enthusiasts point to this staggering growth as a reason to hold cryptocurrency like other worthwhile investments.
At the end of your loan duration, your volatile asset could potentially give you more value, especially as the movement for the wider adoption of cryptocurrencies continues to gain ground.
- Save On Capital Gain Taxes
Selling cryptocurrency at a gain has a tax implication. This is because the IRS categorizes cryptocurrencies, including NFTs, as property which means capital gain tax applies to them in the same way it does to stocks or real estate.
However, buying real estate directly with your crypto holdings or pledging it as collateral for a crypto mortgage exempts you from paying taxes on them. This is because you didn't cash out of the investment; hence, there is no record of gains.
- More Flexibility For Your Financial Needs
When you borrow from a traditional lender to buy a house, you also pledge the underlying property as collateral after making the down payment. However, a crypto mortgage only requires crypto collateral, allowing you to use your asset as needed without limitations.
- Easier And Faster Than Traditional Mortgage Processes
Crypto mortgages do not require all the paperwork and checks that traditional lenders ask for to issue a home equity loan since they only need to confirm that you have enough crypto to cover your loan. This can make the process significantly faster.
You can also take advantage of crypto mortgages to buy a house in the US, even as a foreigner since many platforms do not require your credit score or social security number.
How To Get Crypto-Backed Mortgages
It is pretty straightforward to get a crypto mortgage since various traditional mortgage considerations don't apply here. Most lenders do not inquire how often you recently applied for credit or your credit score as long as you have enough crypto to cover your loan.
Here are a few steps involved in a typical crypto mortgage.
Select A Crypto Mortgage Lender
While the concept is new, a few companies already offer this service in the industry. More are likely to come up as the concept gets more popular.
Therefore, since you have options, check out the different crypto mortgage companies available and choose one that suits your need or requirement.
Start The Application Process
Crypto mortgage has a minimal application process which you will complete to get started. The application process will require you to share some information about yourself; however, the amount of information required will depend on the mortgage platform. While some require only basic information, others may require more.
Specify Your Collateral Amount
You will be required to share the amount of cryptocurrency you want to pledge as collateral. This determines how much you can borrow and the interest rate you'll pay. Some platforms like Figure offer 100% LTV, which means that if you pledge crypto worth $100,000, you'll be able to get a $100,000 loan for your home.
Agree On The Down Payment, Payment Plan, And Interest Rate
Crypto mortgage companies offer different monthly payment plans and interest rates. However, some companies require no down payments. With them, you just have to select a plan that suits you best. Before choosing a plan, check its short and long-term benefits and pitfalls.
Proceed To Buy Your New Home
After completing the application and getting approved, contact a real estate agent or broker to send out offers to your perfect property sellers.
Note that there may be additional steps depending on your chosen crypto mortgage lender. However, these are the basic steps involved in getting a crypto mortgage. Plus, the process is expected to become more streamlined as the industry grows.
Crypto Mortgage vs. Traditional Finance Mortgage?
Crypto and traditional finance mortgages are essentially the same as they allow individuals to borrow money to buy real estate. They are often issued in flexible durations, and borrowers will repay the principal and interest in monthly installments.
However, the main difference between the two is the collateral used to cover the loan. While traditional finance mortgage lenders will require the borrower to use their home's equity as collateral, crypto mortgages only require crypto collateral.
Also, crypto mortgages do not typically require down payments like their traditional counterparts. Plus, the application process is more streamlined than traditional finance mortgages.
The Downsides You Should Know About Crypto Mortgage
While crypto mortgages boast of several advantages, they also have some risks attached, making them unsuitable for some individuals. A borrower needs to be aware of these risks before getting involved.
Crypto Is Highly Volatile
Cryptocurrencies are highly volatile, which means they can move quickly in any direction. While they can appreciate in value, prices can also fall significantly, posing a risk for borrowers whose assets are pledged as collateral.
You will be required to add more funds to your collateral to rebalance it if the value drops; however, it can be more dangerous if the prices drop further, as the lender may be forced to liquidate your position to cover their losses.
The threshold for liquidation depends on the lending company, although some begin liquidating assets once the price falls below 65% of the house's value.
No Control Over Assets
Once you pledge your digital assets to borrow funds, you can't access them until you have cleared the loan. The implication is that you won't be able to realize gains from any sudden jump in the price of the crypto.
Limited Assets Supported
Most crypto mortgage lending platforms only support popular cryptocurrencies and stablecoins such as BTC, ETH, USDC, USDT, AND GUSD. This is quite limiting as borrowers will need to swap to supported coins to access home loans.
Crypto Mortgage Lenders That You Can Explore
As already established, only a few companies offer crypto mortgages, as the concept is still new. However, here are some of the popular ones in the industry today.
Milo
Milo is a Florida-based crypto mortgage platform that was in the news for being the first to offer mortgages backed by crypto in the US. The company offers 30-year loans for real estate investments of up to $5 million. Their rate range from 3.9% to 5.95% and supports Bitcoin, Ethereum, and popular stablecoins.
USDC.Homes
USDC.Homes provides crypto-backed mortgages up to $5 million for prospective Texas buyers. The platform accepts BTC, ETH, and USDC, with rates ranging from 5.5% to 7.5%. Interestingly, USDC.Homes will stake your collateral to accrue interest and offset some of the monthly payments.
Figure
Figure is a North Carolina-based platform that offers loans of up to $20 million for real estate ventures. Interest rates can be as low as 6% on 30-year fixed-rate loans. The platform accepts BTC and ETH and has a waitlist for crypto mortgage loans.
Ledn
Ledn offers crypto-backed loans in Canada with plans to add crypto mortgage offerings for Canadians and US residents. Its annual interest rates range from 7.9% to 9.9%.
The Takeaway
The crypto mortgage concept adds a new option for homebuyers looking for alternative ways to fund their home purchases. However, it may not be suitable for everyone.
A crypto mortgage may be ideal if you have built your wealth in crypto and do not plan to cash out yet. It also has some interesting benefits which you might find worthwhile.
But, it has a few downsides that can't be ignored, making it unsuitable for individuals who dread risks. You can lose your crypto holdings if the value of your collateral falls too low.
Therefore, your choice will depend on how much risk you are willing to take and if you practically can or cannot meet traditional mortgage requirements.
