Cryptocurrency, a digital asset, is ready to transform the real world in the near future with its outstanding perks. The currency has the potential to replace the fiat currency soon. Already performing great in the crypto landscape. The idea of using cryptocurrencies as a loan collateral to get a mortgage loan gained popularity in recent years.
All about Crypto-backed Mortgages
Cryptocurrency, a valuable asset can be used for mortgage loans, and simply needs to pledge the crypto assets to take benefit. Crypto-backed mortgages use cryptocurrencies like Bitcoin (BTC) or any other digital asset as collateral to get a mortgage loan. The idea lets the buyers use the digital assets as collateral to get a loan.
Crypto-backed mortgages work similarly to securities-based loans, as an individual uses electronic currency to get a loan and pay it in a particular time period. However, the interest rates of the crypto mortgage lenders are more competitive when compared to the traditional lenders. Holding a crypto mortgage helps individuals avoid cashing in the crypto holdings early and missing out on potential gains. In addition, the concept does not require any down payment which is another key merit.
The growth and success of the crypto market also boomed the interest of businesses towards crypto-backed mortgages. Milo, Figure, and USDC.homes are some of the companies offering crypto-backed mortgages. Purchase mortgages, cash-out refinancing, and bridge loans are some common types of crypto-backed mortgages.
It’s all about the basics of crypto-backed mortgages. Now, let’s take a look at the overall working of the concept.
The Working of Crypto-backed Mortgages
To bind a conventional loan or mortgage, the concept uses cryptocurrency holdings. The process initiates with the buyer offering the digital assets to the lender as a security. Lenders on the other hand calculate the maximum loan amount based on the value of the collateral. Before assessing the interest rates, term length, and payback terms, the acceptability of the digital asset is assessed. Once the terms are agreed, the buyer simply deposits the agreed amount of cryptocurrency in the lender’s escrow account. Until certain criteria are satisfied, the escrow account is handled and managed by a third party.
Throughout the duration of the loan, the collateral amount was kept locked to control the risks. In addition, borrowers also need to have a certain buffer between the value of the collateral and the loan balance. Focusing on the mode of payment, the payments are mainly done in fiat currency and once the repayment is complete, the collaterals are returned to the borrowers. Sometimes, fluctuations in collateral value take place if the value of the cryptocurrency falls.
Additionally, crypto collateral loans, stablecoin mortgages, fractional ownership mortgages, DeFi mortgages, and cross-collateralization are some crypto-backed mortgage products.
Crypto-backed mortgages use digital currencies as collateral to get a mortgage loan with higher interest rates when compared to traditional loan systems. The process begins with the buyer offering the cryptocurrency to the lender as a security. Once repayment is complete, the collateral amount is paid back to the buyer.