What are Crypto Mortgages
Crypto mortgages work in a similar way to old-fashioned mortgages. The main difference is that the collateral are digital asset holdings.
Who are crypto mortgages for?
Crypto mortgages can be an interesting option for those homebuyers who have built wealth mostly held in cryptocurrencies and who don’t want to sell their crypto investments.
How the Lending Process Works?
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 paycheck stubs.
After the lender decides the terms – how much you can borrow and at what annual interest rate – you have to pledge an amount of your crypto holdings to the lender as collateral of the loan. This can either be equal to 100% of the loan. For example, the collateral would be $400,000 worth of digital assets for a $400,000 loan, or in some cases between 35-50% LTV.
As the market grows and competition increases between lenders for homebuyers, one can expect offerings and accepted digital assets to broaden.
Advantages of crypto mortgages
- You don’t have to cash out of your crypto investments to buy a house with a crypto mortgage. This is important because selling your investments can incur high taxes.
2. It might be easier for foreign citizens to buy real estate in the U.S., as crypto mortgage providers usually don’t require credit score and
a social security number.
Risks and downsides of crypto mortgages
The reason a crypto mortgage isn’t right for most people is simple: Crypto’s price is highly volatile, making them high-risk investments.
If you take out a loan on top of your crypto investments, the risks are compounding. When cryptocurrency markets crash, they bring down the value of the collateral, too.
In this case, two things can happen:
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When the price of the digital assets you have put up as collateral drops, the lender may require you to add more of your investments to the collateral – akin to a margin call in traditional markets. This way, your capital is locked and you cannot trade it.
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If the market value of the collateral falls even deeper, the creditor might have to liquidate – force sell – your assets for a fraction of the price of the investment you have put into it.
There are other downsides of taking out a mortgage loan backed with a cryptocurrency portfolio:
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Borrowers don’t have control over the assets used as collateral, meaning that they cannot trade or otherwise use the crypto pledged.
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The range of cryptocurrencies that providers accept is limited.
