Cryptocurrency is changing how we think about money, investing, shopping, and even real estate. That’s why we’ve teamed up with Money.com to discuss how cryptocurrency may influence your next home purchase or sale.
From comparing the advantages and disadvantages of blockchain real estate loans to expert opinions from Redfin Chief Economist Daryl Fairweather, this article will answer your top questions about crypto real estate.
What exactly is cryptocurrency?
Cryptocurrency is virtual money that’s purchased, sold, traded, and stored strictly over the internet. The technology that powers cryptocurrency is called the blockchain. Blockchains, as their name suggests, are strings of data stored across a series of decentralized networks. Every crypto transaction ever made is recorded—for perpetuity—in a blockchain. The data contained in a blockchain can’t be changed, in part because it’s recorded in so many separate places.
Who is using cryptocurrency?
Chances are, someone that you know owns or has owned cryptocurrency. Recent data reveals that about 16% of Americans have, at some point, invested in or traded crypto. Crypto has made deep inroads with younger generations, but it has been embraced by consumers of all ages. Some 38% of Millennials say that they have some kind of cryptocurrency investments, Gen X-ers (aged 42-57) are next most likely to invest in cryptocurrency, with 28% of them reporting crypto use. Gen Z is close behind, with a reported 23% of them owning cryptocurrencies.
Crypto has penetrated a wide range of financial markets, and the housing market stands out as a key example. One of our recent reports found that 11.6% of first-time homebuyers liquidated crypto assets to purchase their home.
How blockchain technology and crypto are changing real estate
To better understand how crypto has impacted the real estate industry and how it may continue to do so in the future, we sat down with Redfin Chief Economist Daryl Fairweather for her insights.
According to Fairweather, the percentage of homebuyers using crypto to save for their down payment has increased every year from 2019 to 2022. At the same time, many tech companies are working to streamline crypto real estate transactions in order to make it easier for people to buy and sell homes using crypto.
When asked if she foresees the blockchain completely digitizing the traditional real estate process, Fairweather said, “The futuristic world people envision where you pay for a home with digital currency and the transaction just happens instantly is still years away.” She continued, “it’s a hard jump from everything being on paper, on the county level to everything existing on the blockchain. It’s a cool, optimistic version of real estate, but it’s hard to imagine how we get from A to B.”
Even though fully digitized real estate transactions across the industry are still years away, some mortgage lenders are taking the first steps by offering crypto mortgages. Previously, the simplest way to use crypto funds to finance your home was to convert them to cash. However, a crypto mortgage doesn’t rely on having cash—just crypto. Let’s look at how crypto mortgages work and where you can find one.
What is a crypto mortgage?
Crypto mortgage lenders are still rare, but their numbers are growing. The product these companies offer differs considerably from traditional mortgages. Here’s how:
While traditional lenders may rarely consider your crypto assets during the loan origination and underwriting process, that’s the only kind of asset a crypto lender will consider. Traditional mortgage lenders also take your monthly income and credit score into account during their approval process, however, that isn’t always the case for crypto mortgage lenders. That’s because the loans they offer are 100% collateralized by the assets in your crypto wallet.
Here’s another key difference between crypto mortgages and traditional mortgages. With a traditional mortgage, should you spend some of the money you have in your savings or investment accounts, the amount you owe on your home and your monthly payments don’t change. However, with a crypto mortgage, the value of your crypto could change overnight. If the value of your crypto portfolio shrinks, the lender will expect you to make up the difference – up to the amount you owe so your loan remains fully collateralized. Alternatively, a crypto lender might also raise your interest rate or your monthly mortgage payment.
Most banks don’t accept cryptocurrency directly when you make your down payment, mortgage payments, or pay other fees associated with your home purchase. Unless you work with a specialist crypto mortgage lender, you’ll need to cash in your crypto for dollars to make your home purchase.
What are some of the advantages and disadvantages of blockchain real estate loans?
Let’s start with the pros. Here are some of the reasons why you might gravitate towards a crypto mortgage:
- Expedited processes: With a conventional mortgage, the loan origination and underwriting processes may take a month or more. By contrast, blockchain real estate loans can be approved and funded in a matter of days.
- It may be easier to be approved for a mortgage loan: Unlike traditional lenders, many crypto mortgage borrowers don’t require you to provide documentation such as bank statements, tax records, and pay stubs for loan origination or underwriting. Many crypto lenders don’t perform the in-depth credit checks that conventional mortgage lenders require. That means you may be approved for a crypto real estate loan even if your credit or employment history is spotty.
- Traditional assets may not be necessary: If you don’t have a lot of traditional assets, such as cash in the bank or a rich stock portfolio, but rather have your money tied up in cryptocurrency, you may be more likely to be approved for this type of mortgage.
- Your crypto holdings could increase in value: While you need to pledge your crypto assets to secure a crypto mortgage, you don’t have to sell them. If you have faith that your crypto will increase in value, that may be an advantage. If your crypto portfolio gains value, those gains are yours to keep or cash out.
On the flip side, here are some of the drawbacks associated with crypto mortgages:
- It may not be cost-effective: According to Daryl Fairweather, crypto mortgages might not be as cost-effective as other options. “It might seem more convenient not to have to convert your crypto to dollars, but I would suggest investigating whether it’s actually cheaper or not. It may be easier and cheaper to just convert to dollars and go through the traditional mortgage process.”
- High volatility: Perhaps the greatest drawback to crypto mortgages is simply the volatility of the cryptocurrency market. The price of cryptocurrencies can vary widely from day to day, making the amount of crypto a home is worth challenging to determine. Most borrowers don’t want a lot of surprises when it comes to their home financing.
- Rules and regulations are still changing: You’re sailing in largely uncharted waters when you take out a crypto mortgage. Government and banking regulations are still in flux, so what you see may not be what you wind up with. For example, the government could start requiring homebuyers to pay additional taxes for real estate transactions involving crypto loans.
- There are few lenders to choose from: You don’t have as wide a choice of lenders. There are hundreds of thousands of banks, fintech companies, and other financial institutions that make the mortgage market more competitive. However, there are fewer than a handful of crypto mortgage lenders. Others may come on board, but many financial institutions that haven’t fully committed to the business already have consumers waitlisted for the product.
- You may need to reevaluate your financial routine: You can’t sell your crypto if it reduces the amount of value you pledged to get your loan without penalty. If you’re an active crypto trader, that may hamper your financial routine.
Frequently asked questions about crypto real estate mortgages
Does using crypto for my down payment decrease my chances of mortgage approval?
If you cash out of your crypto holdings to make a down payment on a traditional loan, no, not at all. Cash is cash in a traditional lender’s eyes. If you’re taking out a true blockchain real estate loan, you need to use crypto to collateralize it and be approved. Either way, using crypto to pay for your down payment shouldn’t affect the mortgage approval process.
With a true blockchain real estate loan, the volatility of cryptocurrencies is balanced by the stability of the real estate market. Crypto lenders are willing to risk volatility because when they lend to you, they have an ownership interest not only in your crypto assets but also in your home.
How do crypto mortgage rates compare to traditional mortgage rates?
After a sharp decline during the beginning of the pandemic, mortgage rates are on the rise again. In mid-May, the average rate on a 30-year fixed-rate mortgage was around 5.4%. Milo, a well-known crypto mortgage company, advertised its lowest rate as 5.95%. So crypto mortgage rates appear to be higher than traditional mortgage rates, at least for the time being.
Which cryptocurrencies can be used for a crypto mortgage?
That depends on the lender. Some will accept a range of cryptocurrencies, while others may limit you to the most popular and established coins, such as Bitcoin or Ethereum. If your holdings are in lesser-known currencies, you may have to do some shuffling of your portfolio to qualify for a crypto loan from your preferred lender.
What happens if your crypto loses value over time?
You would have to cover losses with more crypto or cash. If the value of your pledged crypto declines below a threshold set by the lender, then you’ll have a limited period to pledge additional crypto.
Summing up crypto real estate
Cryptocurrency ownership is becoming the norm rather than the exception, and the mortgage market has responded. Is using your digital assets to fund your home purchase a good choice for you? That depends on a wide range of factors, including your own projections on how the value of cryptocurrencies will fluctuate.
Your credit history may come into play in your decision. If you have excellent credit, a traditional mortgage may be the way to go. If not, you may be more readily approved for a crypto mortgage. The specific currencies you own may also factor in. Suppose you’re invested in a wide range of lesser-known cryptocurrencies. In that case, you may need to revise your crypto investment strategy to qualify for a crypto loan.
The point is, it’s worth investigating. The good news is that the tremendous number of mortgage lenders competing for your business and the growing array of mortgage products out there today can only put homeownership within reach for more buyers.
This article was created in collaboration with Susan Doktor from Money.com.
Redfin does not provide legal, tax, or financial advice. This article is for informational purposes only and is not a substitute for professional advice from a licensed attorney, tax professional, or financial advisor.
This post first appeared on Redfin.com. To see the original, click here.