The recent crypto boom has made fortunes for many, and some of them want to buy real estate with their new wealth.
There are many examples of real estate developers who want to accept cryptocurrencies as payment, but for certain crypto investors, selling their digital assets is a no-go.
For them, crypto mortgages - loans to buy real estate where the collateral is cryptocurrencies - are the solution.
Last August, United Wholesale Mortgage, the second-largest mortgage lender in the U.S., announced a plan to accept bitcoin payments, but backed down a few weeks later.
United Wholesale Mortgage's withdrawal, however, has not deterred new players from bringing mortgages to the crypto world, as a handful of lenders are rolling out plans to offer crypto-backed loans specifically for homebuyers.
How crypto-backed mortgages work
By and large, crypto mortgages work much like old-fashioned mortgages. The only difference is that the collateral consists of digital assets.
When you take out a crypto mortgage, the lender first examines your crypto holdings to determine how much you can borrow. This is the most important factor in the decision, as lenders for crypto mortgages don't necessarily require a credit check and pay stubs, although it doesn't hurt to have them ready.
After the lender sets the terms - how much you can borrow and at what annual interest rate - you must pledge a portion of your crypto holdings to the lender as collateral for the loan. This amount is usually equal to 100% of the loan. For example, for a $400,000 loan, the collateral would be $400,000 worth of digital assets.
When you close the loan and purchase the property, you begin repaying the loan in monthly installments that can be paid in select cryptocurrencies or traditional fiat currencies.
As the market grows and competition between lenders for homebuyers' crypto wealth increases, it is reasonable to assume that the supply and accepted digital assets will expand.
Where can you get a crypto mortgage?
Crypto mortgages are still a fairly new phenomenon, but there are a growing number of lenders that allow homebuyers to use their digital wealth. All APRs are as of the time of writing.
- Milo, a Florida-based startup, made headlines earlier this year for being the first company in the U.S. to offer crypto-backed mortgages to potential homebuyers. The company specializes in mortgages for real estate investments, offering 30-year loans of up to $5 million with interest rates ranging from 3.95% to 5.95%. Milo requires no down payment (the borrower can finance up to 100% of the property value) 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 at an APR of 5.5% to 7.5%. The down payment for the crypto mortgage is pledged as collateral, so borrowers earn interest on the collateral that offsets a portion of the monthly mortgage payment.
- Figure, a North Carolina-based lender, opened a waiting list for crypto mortgage loans of up to $20 million. The company plans to accept bitcoin and ether as collateral and offer 30-year mortgages with monthly collateral adjustments at an annual interest rate of just 6%.
- Ledn offers bitcoin-backed loans in Canada and plans to offer bitcoin mortgages to customers in Canada and the U.S. this year.
Who are crypto mortgages for?
At this point, crypto mortgages are not the ideal way for most people to buy a new home.
However, they can be an interesting option for homebuyers who have built up assets held primarily in cryptocurrencies and don't want to sell their crypto assets.
Advantages of crypto mortgages
If you are one of these people, there are some advantages to using your crypto assets for a loan:
- First and foremost, you don't have to cash out your crypto investments to buy a home with a crypto mortgage. This is important because capital gains taxes would apply if you sold your investments.
- For foreign citizens, it might be easier to buy a property in the U.S. since crypto mortgage providers usually do not require a credit check or a social security number.
- For someone who believes their crypto holdings will increase more than the interest rate of the loan over time.
Risks and disadvantages of crypto mortgages.
The reason why a crypto mortgage isn't right for most people is simple: the price of cryptocurrencies is highly volatile, making them high-risk investments.
If you take out a loan on top of your crypto investments, the risks increase. When cryptocurrency markets crash, the value of collateral also decreases.
In this case, two things can happen:
- If the price of the digital assets you have posted as collateral drops, the lender may require you to add more of your investments to the collateral - similar to margin calls in traditional markets. In this way, your capital is tied up and you cannot trade it.
- If the market value of the collateral falls even further, the lender may have to liquidate your assets at a fraction of the price of your investments - foreclose.
There are other disadvantages to taking out a mortgage loan backed by a cryptocurrency portfolio:
- Borrowers have no control over the assets used as collateral, which means they can't trade or otherwise use the pledged cryptocurrencies.
- The choice of cryptocurrencies that providers accept is limited.