Want to Buy a House with Your Bitcoin? Here’s How Crypto-Backed Mortgages Work

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Business Insider

As companies like Milo and Figure announced offerings of new crypto-backed mortgages, homeowners and homebuyers are curious to know how they work.

In a Business Insider article, Richard Levin, partner and chair of the Fintech and Regulation Practice at Nelson Mullins, discusses the risk of these new mortgage offerings, including a potential for homeowners and buyers to bring more money into the transaction than originally planned or anticipated: “Anyone that has a digital asset that is posting that as collateral for their loan should proceed with a degree of caution.”

Due to the volatility of cryptocurrencies, lenders may ask for additional collateral if the value of a borrower’s cryptocurreny drops significantly. Levin said homeowners and buyers should ensure they understand the lender’s rules for situations like this before entering into an agreement.

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For those who hold a lot of their wealth in cryptocurrencies such as bitcoin, buying a home can present a challenge.

Most sellers aren’t looking to trade their houses for crypto, and traditional mortgage lenders won’t let you use it for a down payment. The alternative, converting your digital currency to cash, can come with significant tax consequences.

Now, some companies offer mortgages that use cryptocurrency as collateral. With these types of loans, you can purchase a home without having to cash in your crypto.

Crypto mortgages can be useful for those who have a lot invested in cryptocurrency and not as much wealth in other, more traditional assets. But these types of loans are still very new, and come with a lot of risks. 

How do crypto mortgages work?

Only a handful of companies offer crypto-backed mortgage products, and they’ll work slightly differently depending on the lender.

Two of the early entrants into the market, financial-tech companies Milo and Figure, will make loans equal to 100% of the borrower’s cryptocurrency value, with no down payment required.

Milo offers mortgages up to $5 million, while Figure will lend as much as $20 million. Milo accepts bitcoin, ether, and stablecoins. Figure accepts bitcoin and ether. Both lenders’ mortgages come in 30-year terms, similar to traditional loans.

Your interest rate may change periodically based on the value of your cryptocurrency relative to the loan amount. As of mid-April 2022, Milo was advertising rates between 3.95% and 5.95%. For comparison, the average 30-year fixed mortgage rate for the first week of April was 4.72%, according to Freddie Mac. 

While having sufficient cryptocurrency value is the main requirement for approval, lenders will still likely want to look at your credit, debts, income, and the home you’re purchasing.

Josip Rupena, CEO and founder of Milo, says that although a borrower’s credit isn’t used as the basis for approving or denying a mortgage, his firm still wants to understand a borrower’s full financial situation to ensure they have the ability to repay the loan.

“We’re still going to ask for an appraisal, title insurance,” Rupena says. “We’re going to look at this person’s credit profile if they have one.”

Once you close on the loan and own the home, you’ll make monthly payments, just as you would with a traditional mortgage. After you pay off the debt, you’ll regain full control of the crypto you used as collateral.

Crypto mortgage benefits

The main draw of a crypto mortgage is that you don’t have to sell your cryptocurrency to use it as collateral on your mortgage. This means 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 around mortgage where you’re combining two assets and being able to deliver the desire of the consumer, which is continuing to own both of them,” Rupena says. “And hopefully they both appreciate over time.”

Another attractive feature of crypto mortgages is that the lender has recourse other than foreclosure if a borrower isn’t able to make their payments, Rupena says. Ultimately, though, the lender may still have the ability to foreclose on your home if you stop making payments and your cryptocurrency isn’t sufficient to cover what you owe.

Crypto mortgage risks

“Anyone that has a digital asset that is posting that as collateral for their loan should proceed with a degree of caution,” says Richard Levin, chair of the fintech and regulation practice at the law firm Nelson Mullins Riley & Scarborough.

The big risk of a crypto mortgage is that you could end up having to bring more money into the transaction if the value of your cryptocurrency drops.

Cryptocurrencies are typically very volatile, meaning their prices fluctuate widely. If you use your bitcoin as collateral on your mortgage and then the value of bitcoin drops significantly, your lender might ask you to add to your collateral. This is known as a margin call.

Levin says that borrowers who are 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 currency to get their collateral back up to 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 can 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 purchase a home through traditional means. Rupena himself suggests that people who have the income and meet the criteria for getting a regular mortgage should go that route.

Crypto mortgage FAQs
How do I pay my crypto mortgage?

Depending on the lender, you may be able to pay with either US dollars or cryptocurrency.

What types of cryptocurrency can be used for a crypto mortgage?

Bitcoin is the most common cryptocurrency accepted for these mortgages, but some lenders also accept ether. 

What happens to my crypto while I’m paying off the mortgage?

You can’t sell or stake your crypto while using it as collateral on your mortgage. If your cryptocurrency value increases, you may be able withdraw some of it, provided you’re able to maintain a sufficient level of collateral.