The shift of digital currencies into the financial mainstream is steadily becoming a reality. 

Though commanding multi-billion dollar market caps, crypto still gets sneered at by many traditional institutions, and among them are mortgage lenders. The currency’s volatility is the primary reason, but there is also concern about the legality and transaction history.

Yet the surge of millennial and Gen Z buyers entering the home buying market and carrying a formidable amount of crypto in their portfolios has caused specific lenders to explore offering mortgages exclusively through crypto. Although the premise may be exciting for diehard believers in crypto’s future, there are significant risks and benefits that up-and-coming buyers should consider.

Below, we outline the pros and cons of getting a mortgage with crypto.  

How do you get a mortgage with crypto?

A crypto mortgage, in essence, is not much different from a traditional one. Many are issued for a 30-year period, and you make monthly payments comprised of principal and interest. The differences are in what you use to secure the loan and the interest rate you receive, along with the possibility of financing 100% of the house without making a down payment. 

Several startups, such as Milo and Figure, have pierced the mortgage lending market with business models focused entirely on cryptocurrencies. Buyers can pledge their coins towards the total value of a house, and the crypto-lenders will finance up to 100% of the home in dollars. They then keep your crypto as collateral in a third-party account, and you pay down the loan balance in fiat currency or crypto.

Pros of getting a mortgage with crypto

• You don’t have to liquidate your crypto assets
• The crypto might grow in value
• More flexibility for your financial needs

You don’t have to liquidate your crypto assets

One of the most significant drawbacks of using crypto in almost any real estate-related transaction is the liquidation of crypto holdings. 

Because most traditional mortgage lenders are skeptical of the digital currency’s volatility, they usually require buyers to liquidate it into cash. Unfortunately, this forces homebuyers to potentially lose out on the crypto’s appreciation while being at risk of facing a taxable event since the money is considered income.

Crypto-focused mortgage lenders essentially eliminate a forced liquidation because they allow you to secure the loan exclusively through crypto. Buyers can offer a given home’s value in crypto as collateral instead of liquidating it. This concept lets the buyer bet on crypto appreciation and the home property without experiencing the taxable event of turning their crypto assets into cash.

The crypto might grow in value

Digital currency’s volatility can also work in a buyer’s favor. Many investors that hail crypto as a worthwhile investment point to the staggering growth that Bitcoin, and other crypto like it, have experienced over the past decade. 

It is undeniable that there is a strong potential for crypto’s appreciation as it gains wider adoption, which makes investing it in real estate even more alluring. A buyer has the opportunity for both assets, the home and the crypto used to buy it, to appreciate. In the case of a crypto-backed mortgage, the digital currency placed as collateral can skyrocket in value while the buyer pays off the loan. 

Homebuyers who get a mortgage through a lender that offers crypto as a form of payment for the loan can reap the benefits of appreciating digital currency. As the coins grow in value, the amount you initially used as collateral can theoretically grow and leave you with positive equity.   

More flexibility for your financial needs

Traditional lenders use the underlying property as collateral when a buyer applies for a loan. In the case of crypto-lenders, the only asset being used for collateral is digital coins, which can be a welcoming prospect for aspiring homeowners with the majority of their wealth held in crypto.

For those who prefer to have options, using a crypto-lender to secure a mortgage allows buyers to freely utilize other assets that aren’t crypto. Buyers will only have to use their crypto for the loan, while their remaining assets stay put or are used as needed without limitations.

Cons of getting a mortgage with crypto

• Crypto is a volatile asset 
• The interest rates might be higher 
• Crypto mortgage loans might have limitations

Crypto is a volatile asset

Bitcoin’s growth over the years is unmistakable, but even astounding appreciation numbers don’t eliminate the risk of crypto investors using their holdings as collateral.

If the crypto you used to collateralize your home loan crashes, you might have to add even more crypto to cover the difference. It can get even more dangerous if the currency plummets further, causing the crypto-lenders to liquidate the coins being used as collateral to, in turn, cover their losses.

The threshold for triggering such an event depends on the mortgage lender. Some will begin liquidating the crypto assets once it falls below 65% of the house’s value. Others have different parameters. But there is always a risk when using crypto to finance a home.

The interest rates might be higher

Traditional 30-year mortgage rates have recently risen to a 5% interest rate. Some start-ups that offer crypto mortgages try to remain within the same range when offering loans. But the interest rates a buyer will end up paying can depend on several factors.

Many crypto-lenders evaluate a buyer’s qualification for a loan based exclusively on the value of the digital currency they own. This is because a particular buyer's wealth in crypto can determine what kind of interest rate they will get. Interest rates on conforming loans today average around 5% on a 30-year, fixed-rate mortgage. Crypto loans can go up to 10% or 12%, depending on the lender.

Crypto mortgage loans might have limitations

Buyers that hope to fund their home purchase with crypto have many new options. But even though up-and-coming startups that specialize in crypto-backed mortgages may seem like a dream come true for many borrowers, there are limitations to consider.

Some crypto-lenders will require that the entire amount of a loan on a home be completely paid off before the buyer can sell it. This may prevent buyers from tapping into equity they might get as the home appreciates.