Learn how crypto-backed mortgages enable purchasing a house with bitcoin

Learn how crypto-backed mortgages enable purchasing a house with bitcoin

Buying a Home with Cryptocurrency: Exploring Crypto Mortgages

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For those who have invested a significant portion of their wealth in cryptocurrencies like Bitcoin, purchasing a home can be a real challenge. Most sellers are not ready to accept crypto as payment, and traditional mortgage lenders do not allow it for down payments either. Converting digital currency to cash comes with significant tax consequences. However, the emergence of crypto-backed mortgages provides an alternative solution.

How do crypto mortgages work?

Only a handful of companies currently offer crypto-backed mortgage products, and each operates slightly differently. Financial tech companies Milo and Figure are two early entrants into the market. They provide loans equal to 100% of the borrower’s cryptocurrency value, eliminating the need for a down payment.

Milo offers mortgages up to $5 million, while Figure will lend up to $3 million. Milo accepts bitcoin, ether, and stablecoins, while Figure accepts bitcoin and ether. The loan terms for both lenders are 30 years, similar to traditional mortgages. However, the interest rates may change periodically based on the value of the cryptocurrency relative to the loan amount.

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While having sufficient cryptocurrency value is the primary requirement, lenders will still consider other factors like credit, debts, income, and the property being purchased. Milo’s CEO, Josip Rupena, emphasizes the importance of a borrower’s overall financial situation to ensure their ability to repay the loan.

Once the loan is closed, monthly payments need to be made, just like with a traditional mortgage. After the debt is fully paid off, the borrower regains complete control over the crypto used as collateral.

Crypto mortgage benefits

The main advantage of a crypto mortgage is that it allows borrowers to use their cryptocurrency as collateral without selling it. This not only helps avoid tax consequences but also allows individuals to benefit from future increases in crypto value. It’s an innovation that combines two assets and allows consumers to retain ownership of both with the hope that both assets appreciate over time.

Another intriguing feature of crypto mortgages is that lenders have alternative recourse, apart from foreclosure, if a borrower cannot make payments. However, lenders may still foreclose on the home if payments stop and the cryptocurrency collateral is insufficient to cover the remaining amount owed.

Crypto mortgage risks

As Richard Levin, chair of the fintech and regulation practice at law firm Nelson Mullins Riley & Scarborough, cautions, anyone using digital assets as collateral should proceed with caution. The biggest risk associated with a crypto mortgage is the potential need to inject additional funds into the transaction if the value of the cryptocurrency drops.

Cryptocurrencies are notorious for their volatility, with prices fluctuating widely. If a borrower uses Bitcoin as collateral and its value significantly drops, the lender may require additional collateral, known as a margin call. Borrowers considering crypto mortgages should ensure they fully understand the lender’s rules regarding margin calls and whether alternative cryptocurrencies or traditional currency can be used to restore collateral back to an acceptable level.

For example, Milo will request a margin call if the collateral value drops to 65% of the loan amount. If it further decreases to 30%, the cryptocurrency will be liquidated into US dollars. Additionally, the interest rate on the loan can change based on the value of the cryptocurrency backing the loan.

Given these risks, crypto mortgages are best suited for individuals who cannot obtain a traditional mortgage. Even Rupena suggests that those with the income and eligibility for a regular mortgage should consider that option.

Frequently Asked Questions about Crypto Mortgages

Here are some common questions potential borrowers may have about crypto mortgages:

1. How do crypto mortgages work?
   • Crypto mortgages allow borrowers to use their cryptocurrency as collateral for a home loan without having to sell the digital assets.
2. What companies offer crypto mortgages?
   • Currently, only a few companies, such as Milo and Figure, provide crypto-backed mortgage products.
3. Can I avoid tax consequences with a crypto mortgage?
   • Yes, by using your cryptocurrency as collateral instead of selling it for cash, you can avoid tax implications.
4. Are there risks associated with crypto mortgages?
   • Yes, the value of cryptocurrencies is volatile, and if the value drops significantly, lenders may require additional collateral, potentially resulting in a margin call.
5. Can I regain control of my crypto collateral after paying off the mortgage?
   • Yes, once the loan is fully repaid, you regain full control over the cryptocurrency used as collateral.

In summary, crypto mortgages have emerged as an option for individuals who have substantial investments in cryptocurrencies and prefer not to sell them to finance a home purchase. While they offer benefits such as tax avoidance and the potential for future value appreciation, borrowers must be aware of the associated risks, including potential margin calls due to cryptocurrency price fluctuations. Ultimately, crypto mortgages should be considered when traditional mortgage options are not available.

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