It seems as though cryptocurrency is here to stay and financial institutions are starting to think about how they can move with the times and keep up. Mortgage lender UWM announced that they are currently developing a new mortgage option that will let people make payments using cryptocurrency. There have also been legislative moves in Spain to make this an option for all citizens in the country. In the future, the Bitcoin mortgage will probably be the norm, but how will it work and what are the benefits?
How Do Cryptocurrencies Work?
Cryptocurrencies are completely digital money that use encryption techniques to verify transactions and regulate the creation of new coins. Because it isn't tied to any bank, government or other institution, cryptocurrency has a lot of benefits over traditional fiat money. For example, since all of the currencies rely on their respective blockchain technology, they aren't at risk for inflation or the manipulation that is inflicted on fiat currencies. Due to the encryption and the decentralized nature of cryptocurrencies, they are also much more difficult to steal than traditional money, as long as users take care to make sure their private accounts are secure.
A blockchain is a decentralized public ledger that tracks and executes transactions. Each transaction is stored as a 'block' of information on separate computers, known as nodes. So, instead of all of the information about transactions being stored in a centralized location by an institution like a bank, it is stored on computers across the world. All cryptocurrencies operate using a blockchain.
What Are The Benefits Of The Blockchain?
There are several key benefits of blockchains. Because it isn't controlled by a central authority, transactions made on the blockchain can't be easily tampered with or manipulated. The blockchain also makes transactions much faster and more secure, while at the same time eliminating the need for a third-party intermediary that may charge fees. It is also easier to verify transactions on the blockchain than with traditional banks. This means that it is not necessary for companies like UWM or others who wish to use cryptocurrencies as an option in their loans to verify the authenticity of transactions. This saves a lot of time and reduces the need for additional personnel. So, what will it look like when you get your mortgage in cryptocurrency?
How Will The Bitcoin Mortgage Work?
Although some lenders claim to offer a Bitcoin mortgage, this is not actually the case. They may allow borrowers to pledge crypto, but this is a margin loan (or securitized loan) and not an actual mortgage. Currently, a mortgage where the loan itself is in cryptocurrency and the property is purchased with crypto does not exist and could prove to be difficult to create. Although UWM is offering a mortgage where borrowers can make payments in Bitcoin, the actual loan is still in dollars (fiat) and the amount paid in Bitcoin is relative to their equivalent value in dollars. Keep in mind, the sale of Bitcoin is considered property by the IRS, therefore you may be taxed on any gains, so be careful when doing so.
In the future, as crypto becomes more recognized as a legitimate currency, we may see more homeowners willing to sell their properties for Bitcoin and other cryptocurrencies, as there are only a few cases where these transactions have occurred. Mortgage providers could start offering mortgages that are entirely crypto-based if set up properly, but would need the support, ecosystem and the risks to be ideal.
In the future, there is also the potential for the blockchain to be used to make the mortgage process faster and more secure. All parties could publish the relevant information on a private blockchain, which means the access to all loan conditions will forever be in stone. Even lenders that do not accept crypto as a payment option may still use the blockchain to manage the mortgage application process. Both the lender and borrower could use a smart contract and possible use of public keys to write a contract that binds both of them into making payments.
In the future, lenders may also use cryptocurrency such as Ethereum's Smart Contracts in order to create self-enforcing contracts that remove third parties from the process. Each step of the process will be executed automatically when the necessary requirements are met, making things much faster. This will also reduce administrative costs, making it cheaper for consumers to purchase properties.
The long-term impact that cryptocurrency will have on the mortgage industry is still not known. However, more lenders are in the process of developing their own Bitcoin mortgage and exploring how the blockchain could be used to streamline the process. In the future, it is very likely that cryptocurrencies and blockchains will be central to the way that people purchase property.