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Crypto mortgages: pros and cons

Digital asset-backed mortgages allow home buyers to use their crypto holdings as collateral.

The latest cryptocurrency boom has created fortunes for many and some of them are looking to buy real estate with their new riches.

There are many examples of real estate developers who are eager to accept cryptocurrencies as payment, but for some crypto investors, selling their digital assets is a no-go.

For them, crypto mortgages – loans for the purchase of real estate where the collateral is encrypted – is the solution.

Last August, United Wholesale Mortgage, the second-largest mortgage lender in the United States, announced a plan to start accepting bitcoin payments, but backtracked a few weeks later.

The reversal of United Wholesale Mortgage, however, hasn’t scared new players from bringing mortgages into the cryptocurrency world, as a handful of lenders are implementing plans to offer cryptocurrency-backed loans specifically for home buyers.

How cryptocurrency-backed mortgages work

At a high level, crypto mortgages work similarly to old-fashioned mortgages. The only difference is that collateral is holdings in digital assets.

If you take out a crypto mortgage, the lender first checks your crypto holdings to assess how much you can borrow. This is the most important factor in the decision, because crypto mortgage lenders won’t necessarily require credit history and payroll stubs, although it doesn’t hurt to have them ready.

After the lender has decided on the terms – how much you can borrow and at what annual interest rate – you must pledge an amount of your crypto holdings to the lender as collateral for the loan. This is usually equal to 100% of the loan. For example, the guarantee would be $400,000 of digital assets for a $400,000 loan.

When you close the loan and buy the property, you begin to repay the loan in monthly installments that can be paid in selected cryptocurrencies or traditional fiats.

As the market grows and competition increases among lenders for the crypto wealth of home buyers, accepted digital offerings and assets can be expected to expand.

Where you can get a crypto mortgage

Crypto mortgages are still a pretty new phenomenon, but there are a growing number of lenders that allow home buyers to take advantage of their digital wealth. All annual percentage rates are updated at the time of writing.

  • Milo, a Florida-based startup, made headlines earlier this year for being the first to offer crypto mortgages in the U.S. for potential home buyers. The company specializes in mortgages for real estate investment purposes and offers 30-year loans of up to $5 million with rates ranging from 3.95% to 5.95%. Milo does not require a down payment (the borrower can fund up to 100% of the value of the property) and accepts bitcoin (BTC), ether (ETH) and some stablecoins (USDC, USDT, Gemini USD) as collateral.
  • USDC. Homes offers crypto mortgages for those who want to buy real estate in Texas. The lender accepts bitcoin, ether, USDC and other cryptocurrencies as collateral to borrow up to $5 million for an APR of 5.5% to 7.5%. The crypto mortgage down payment is staked, so borrowers accrue interest on the collateral that offsets a portion of the monthly mortgage payment.
  • Figure, a North Carolina-based lender, has opened a waiting list for crypto mortgage loans of up to $20 million. It plans to accept bitcoin and ether as collateral and offer 30-year fixed-rate mortgages with monthly collateral adjustments at an annual rate of less than 6%.
  • Ledn offers bitcoin-backed loans in Canada and is planning to offer bitcoin mortgages to customers in Canada and the United States this year.

Who are crypto mortgages for?

Right now, crypto mortgages are not the ideal way for most people to buy a new home.

But it can be an attractive option for those home buyers who have built wealth mostly held in cryptocurrencies and who don’t want to sell their crypto investments.

Pros of Crypto Mortgages

If you are one of them, there are some advantages of taking advantage of your crypto holdings for a loan:

  • First, you don’t have to cash out your crypto investments to buy a home with a crypto mortgage. This is important because selling your investments would result in capital gains taxes.
  • It may be easier for foreign nationals to buy real estate in the United States, as crypto mortgage providers usually don’t require a credit score and social security number.
  • For someone who believes that their crypto holdings will appreciate more substantially than the loan rate over time.

Risks and disadvantages of crypto mortgages

The reason why a crypto mortgage is not fair for most people is simple: the price of Crypto is highly volatile, making them high-risk investments.

If you take a loan in addition to your crypto investments, the risks are getting worse. When cryptocurrency markets collapse, they also lower the value of collateral.

In this case, two things can happen:

  • When the price of the digital assets you’ve put on as collateral drops, the lender may ask you to add more of your investments to the collateral, similar to a margin call in traditional markets. This way, your capital is locked and you can’t trade it.
  • If the market value of the collateral drops even deeper, the creditor may have to liquidate – force the sale – your assets for a fraction of the price of the investment you put into it.

There are other downsides to taking out a mortgage loan secured by a cryptocurrency wallet:

  • Borrowers do not have control over the assets used as collateral, which means they cannot trade or otherwise use the committed cryptocurrency.
  • The range of cryptocurrencies accepted by providers is limited.
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