Perhaps it was a natural expansion of the cryptocurrency boom. Popular digital cryptocurrency options like Bitcoin or Dogecoin are an increasingly accepted form of payment for real-world items. This additional form of spending power moves cryptocurrency beyond a part of an investment portfolio.
People with cryptocurrency investments have a digital wallet that holds electronic coins. They use the digital wallet to transfer or trade the coins for goods or services through an online exchange platform. However, cryptocurrency like Bitcoin isn’t widely accepted, and in some ways, it is cumbersome (and potentially cost prohibitive) to use. So, it might come as something of a surprise that cryptocurrency has found its way into real estate.
Cryptocurrency and the relationship with home mortgages are in their infancy. However, as a matured financial app development firm we believe we have a sense of what’s to come. Two such companies recently tested the waters of cryptocurrency and its viability to secure a home mortgage loan. Milo, a Miami-based mortgage company, launched a full-fledged cryptocurrency service. Using Bitcoin as collateral, Milo qualified applicants for 30-year mortgage loans. It may not be long before other markets see crypto-backed mortgage loans, like what we’re seeing in New York City.
Another company curious about cryptocurrency’s potential, United Wholesale Mortgage, briefly piloted payment of home mortgage loans using crypto in late 2021. The experiment didn’t last long as they paused the program indicating that the demand did not meet the need.
Is this a new frontier for purchasing a home that early adopters or the financially adventurous will embrace? Or is it better to take a wait-and-see approach? Let’s take a look.
What is Cryptocurrency?
In the simplest terms, a cryptocurrency, like Bitcoin, is about trust. This statement might seem counterintuitive given the market volatility for cryptocurrency. However, the confidence comes from what supports cryptocurrency: the blockchain.
The blockchain is essentially non-corruptible digital record keeping. It uses cryptographic technology, where the blockchain is a virtual ledger. Instead of a company or government maintaining this record, the blockchain ledger uses extensive computer networks that verify transactions. The ledger is visible to anyone that cares to look, thereby creating trust in its authenticity and validity.
Understanding how the blockchain works, the concept of using cryptocurrency with home mortgage loans doesn’t seem that far of a stretch. Crypto-backed loans function similarly to a standard securities loan. In place of a car as collateral, cryptocurrency is the asset to back the loan.
Mortgages of Tomorrow
Milo is one of the first companies to consider an applicant’s cryptocurrency assets when deciding on a home mortgage loan. Instead of applicants cashing in their crypto investments for down payments, Milo decided to accept Bitcoin as collateral. This option saves the applicant from potential tax liabilities that come with selling Bitcoin. Nor would they miss out should Bitcoin continue to increase in value.
Several factors appeal to people using their cryptocurrency investments for loans. Crypto loans typically offer better interest rates than traditional loans and are often lower than credit card rates. Crypto loans don’t require a credit check, which appeals to people who own cryptocurrency and have poor or no credit. When approved, funding for crypto-backed loans happens in hours rather than days or even weeks.
The meteoric rise in cryptocurrency – particularly bitcoin – continues altering the financial landscape. It was inconceivable for home mortgage lenders to consider crypto as part of an application a few years ago. Today, adding crypto as an asset could be the difference in how much an applicant can borrow. It may even be the difference in getting approved for a loan at all.
A Healthy Dose of Uncertainty
Volatility remains perhaps the biggest obstacle to cryptocurrency’s acceptance within the real estate mortgage industry. Over the last two years, Bitcoin’s value has fluctuated between $11K to $66K at its peak. Even with these peaks and valleys, the daily fluctuation isn’t much better.
Cryptocurrency remains largely unregulated. This pattern is typical for technology as advances and innovation outpace regulations and legislation. Some countries are closer to adopting regulations that may bring stability to the market. However, there aren’t many widely accepted cryptocurrency regulations globally.
Currently, the demand for cryptocurrency as an alternative means to secure a mortgage loan isn’t very high. Perhaps that’s because cryptocurrency isn’t a common investment for many people.
Volatility, lack of regulation, and minimal demand make it difficult for companies to rely on cryptocurrency to determine a mortgage loan. While regulations with cryptocurrency lag behind the technology, legislation in the US does classify owning crypto as property.
Using crypto to pay a monthly mortgage bill could be taxable. If there is a difference between the initial cost of cryptocurrency and the market value spent or sold, this could incur capital gains tax. This tax would be in addition to other taxes and fees associated with converting crypto to spendable cash.
Using cryptocurrency to secure or pay for a home mortgage loan is a future that is rapidly becoming a reality. Dogtown Media understands crypto and mobile applications. We offer a free consultation for you to see how we can bring your mobile crypto applications to the hands of your customers.
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