Crypto-backed mortgages have gained popularity in recent months, as they enable individuals to purchase their dream homes through loans collateralized by digital currencies like Ethereum and Bitcoin.

With such mortgages, crypto users do not need to sell their token holdings to finance their home purchases. Instead, they deposit their crypto in lending protocols to borrow loans and withdraw the collateral after repayment.

In this article, we dive deeper into crypto-backed mortgages and explain the process of obtaining them. Stick around to learn more.

Crypto-Backed Mortgage Explained

Simply put, a crypto-backed mortgage is a home loan where borrowers use their cryptocurrencies as collateral. The process of obtaining this type of loan is straightforward. Firstly, you send the accepted crypto to the lender as collateral. After that, you receive the borrowed amount in a stablecoin or fiat currency to fund your house purchase.

The deposited collateral will not be cashed out as long as you continue making timely repayments. Note that you may be required to add more funds if your collateral plummets in value due to price volatility.

Steps for Securing Crypto-Backed Mortgage

1. Eligibility Criteria – When selecting the crypto lending protocol to use, consider the requirements that must be fulfilled to obtain a mortgage. For example, check the collateral requirement to find out how much crypto you need to deposit to get your ideal loan amount.

2. Regulatory Compliance – Crypto lenders are expected to prevent money laundering. For this reason, they require potential loan borrowers to provide proof of their source of funds to ensure they’re legitimate. That said, prepare to share details such as the transaction history of your crypto wallet.

3. Loan Application – After identifying your ideal crypto lender, apply for a loan. If approved, send the requested digital assets to the provided wallet address to allow the lender to process your loan.

4. Collateral Management and Repayment – Once you obtain your loan amount, a repayment structure will be provided alongside the interest amount to be paid. Moreover, you are expected to monitor your loan collateral regularly to make adjustments where necessary.

Advantages of a Crypto-Backed Mortgage

1. Preserving Your Cryptocurrency Investments – A crypto-backed mortgage lets you access money to buy property without selling your digital assets. That means if the crypto serving as collateral rises in value, you can cash out the gains after fully repaying the loan.

2. Possible Tax Benefits – Considering that some countries impose capital gains taxes on digital assets, crypto-backed mortgages help you avoid such tax liabilities since you will not sell your cryptocurrencies to finance a home purchase.

3. Smooth Approval Process – Unlike in the traditional banking sector, where loans take several days or weeks to be processed, crypto lenders approve loans within minutes. Moreover, crypto loans are accessible to everyone, thus serving the unbanked.

Disadvantages of a Crypto-Backed Mortgage

1. Crypto Volatility – Digital currencies are known to be highly volatile. So, if your collateral plunges below a particular threshold, a margin call will be issued, requesting you to add more assets. If you fail to do so, your collateral will be liquidated to repay the loan, hence losing your cryptocurrencies.

2. Legal Landscape – Crypto regulations vary from one region to another. Therefore, before applying for a loan, ensure the lender adheres to local laws to avoid legal issues.

3. Complex Loan Terms – If you are completely green in crypto, you may find certain loan terms to be confusing. For instance, if you don’t understand the margin call conditions, you may lose your crypto assets.

Final Thoughts

Decentralized finance protocols continue to revolutionize the traditional financial sphere. Today, platforms like Nexo and Ledn let users access mortgages easily without selling their cryptocurrencies. However, not all are legitimate crypto lenders. So, do your due diligence before depositing assets in any protocol.

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