- Crypto mortgages allow borrowers to use their cryptocurrency as collateral to buy a home.
- You don’t have to sell your assets to get one of these mortgages, which means you’ll avoid tax consequences.
- If the value of your cryptocurrency falls too low, your lender may liquidate your assets.
- Read more stories from Personal Finance Insider.
For those who hold much of their wealth in cryptocurrencies such as bitcoin, buying a home can present a challenge.
Most sellers aren’t looking to trade their homes for crypto and traditionals
won’t let you use it for a deposit. The alternative, converting your digital currency to cash, can have significant tax consequences.
Now, some companies are offering mortgages that use cryptocurrency as collateral. With these types of loans, you can buy a home without having to cash out your crypto.
Crypto mortgages can be useful for those who have invested heavily in cryptocurrency and not as much wealth in other more traditional assets. But these types of loans are still very new and involve many risks.
How do crypto mortgages work?
Only a handful of companies offer crypto mortgage products, and they will work slightly differently depending on the lender.
Two of the early market entrants, fintech companies Milo and Figure, will provide loans equal to 100% of the value of the borrower’s cryptocurrency, with no down payment required.
Milo offers mortgages up to $5 million, while Figure will lend up to $20 million. Milo accepts bitcoins, ethers and stablecoins. Figure accepts bitcoin and ether. Mortgages from both lenders have 30-year terms, similar to traditional loans.
Your interest rate may change periodically depending on the value of your cryptocurrency relative to the loan amount. As of mid-April 2022, Milo was showing advertising rates between 3.95% and 5.95%. By comparison, the average 30-year fixed mortgage rate for the first week of April was 4.72%, according to Freddie Mac.
While sufficient cryptocurrency value is the primary requirement for approval, lenders will likely want to review your credit, debts, income, and the home you’re buying.
Josip Rupena, CEO and Founder of Milo, says that while a borrower’s credit isn’t used as the basis for approving or denying a mortgage, his company still wants to understand a borrower’s complete financial situation to ensure that he has the capacity to repay the loan. .
“We’re always going to ask for an appraisal, title insurance,” Rupena says. “We will review this person’s credit profile if they have one.”
Once you’ve taken out the loan and own the home, you’ll make monthly payments, just like you would with a traditional mortgage. After repaying the debt, you will regain full control of the crypto you used as collateral.
Crypto Mortgage Advantages
The main appeal of a crypto mortgage is that you don’t have to sell your cryptocurrency to use it as collateral on your mortgage. This means that you won’t have to pay taxes on the sale of your assets and you can benefit from future increases in value.
“It’s a fundamental innovation in mortgages where you combine two assets and are able to meet the desire of the consumer, who continues to own them both,” Rupena said. “And I hope they both like each other over time.”
Another interesting feature of crypto mortgages is that the lender has recourse other than foreclosure if a borrower is unable to make their payments, Rupena explains. Ultimately, however, the lender may still have the option of repossessing your home if you stop making payments and your cryptocurrency isn’t enough to cover what you owe.
Crypto Mortgage Risks
“Anyone who owns a digital asset who posts it as collateral for their loan should proceed with some caution,” says Richard Levin, chairman of the fintech and regulatory practice at law firm Nelson Mullins Riley & Scarborough. .
The big risk of a crypto mortgage is that you might end up having to bring more money into the deal if the value of your cryptocurrency drops.
Cryptocurrencies are generally very volatile, which means that their prices fluctuate considerably. If you use your bitcoin as collateral on your mortgage and the value of bitcoin drops significantly, your lender might ask you to add to your collateral. This is called a margin call.
Levin says borrowers considering getting a crypto mortgage should make sure they understand the lender’s rules for situations like this, and whether they can use different cryptocurrencies or traditional currencies to bring back their collateral. at an acceptable level.
Milo, for example, will request a margin call if the value of your collateral drops to 65% of the loan amount. Once it reaches 30%, it will liquidate your cryptocurrency into US dollars. Your interest rate may also change depending on the value of the crypto backing your loan.
Because of the risks, crypto mortgages are probably best used only if you can’t buy a house through traditional means. Rupena himself suggests that people who have income and meet the criteria for getting a regular mortgage should go this route.
Crypto Mortgage FAQs
How do I pay my crypto mortgage?
Depending on the lender, you may be able to pay in US dollars or cryptocurrency.
What types of cryptocurrency can be used for a crypto mortgage?
Bitcoin is the most commonly accepted cryptocurrency for these mortgages, but some lenders also accept ether.
What happens to my crypto while I pay off the mortgage?
You cannot sell or stake your crypto while using it as collateral on your mortgage. If the value of your cryptocurrency increases, you may be able to withdraw some of it, provided you can maintain a sufficient level of collateral.