Could you imagine paying your mortgage — one of life’s biggest expenses — with a bag of magic marbles that were sometimes worth $11,000 each and other times worth $60,000 each?
If you wanted to pay your mortgage with Bitcoin, that’s essentially what you’d be doing.
It’s been a big year for cryptocurrency, and consumers can buy more things than ever with crypto — though financial planners and other experts say they probably shouldn’t. Even mortgage lenders are starting to murmur about making cryptocurrency payments a thing.
United Wholesale Mortgage, the nation’s second-largest mortgage lender, announced — and quickly scrapped — a plan to accept crypto payments in August. Customers said the option to pay their mortgage with crypto was “cool,” the company says, but they ultimately stuck to their original payment method of good, old-fashioned U.S. dollars.
Paying for things, and even mortgages, with cryptocurrency may be “cool,” but that doesn’t make it smart. Here’s what experts have to say about paying your mortgage with Bitcoin or other cryptocurrencies:
Should You Pay for Your Mortgage With Bitcoin?
No, to put it simply. Cryptocurrency is a notoriously volatile and speculative asset to hold. Personal finance experts say it should comprise no more than 5% of your overall portfolio and not get in the way of other financial priorities like saving for emergencies, paying down high-interest debt, or a conventional retirement strategy.
pPaying for things — including mortgages — with cryptocurrency is a bad idea full of unnecessary risk, these experts say. For starters, the price you pay for something today might not be what your purchase or payment is worth tomorrow. In other words, a $1,500 Bitcoin mortgage payment today could easily become a $3,000 mortgage payment tomorrow.
Also, most businesses that accept crypto start with the most popular cryptos like Bitcoin and Ethereum, which on account of their volatility are particularly ill-suited to use for payments and purchases, experts say. While more innovation and stability in the future could change the dynamic, “we are not there yet,” we were told recently by Kiana Danial, author of “Cryptocurrency Investing for Dummies” and the personality behind @Investdiva on Instagram.
Bitcoin and Mortgages — How Would It Even Work?
There are a few ways a borrower might use cryptocurrency in the mortgage process, says Robert Heck, vice president of mortgage at online mortgage marketplace Morty. Each way is subject to varying state laws and regulations, and of course the policies differ from lender to lender, but here’s a general overview.
Crypto as an Asset
First, lenders are starting to recognize cryptocurrency as an asset when you apply for your mortgage. You wouldn’t pay directly with your crypto assets, but they could be evaluated as part of your mortgage application. When you apply for a mortgage, you list all of your properties, cash, and cash equivalent assets so lenders can determine how much you are qualified to borrow. More and more, says Heck, lenders may start to view a person’s crypto holdings similar to how they’d view holdings in stock.
Prepare to pay capital gains taxes any time you sell your bitcoin holdings, and make sure there is a proper paper trail if you plan to use the cash for a down payment.
“It is now an asset that is being recognized by the agencies,” Heck says. “It’s something that can be used during the closing process on conventional mortgages. But that being said, it’s fairly early.”
Technically, crypto is liquid — meaning you can quickly sell it for cash — but since the value is so up and down, lenders aren’t going to consider it equal to having cash savings in an accessible account. Still, crypto will probably count for something, most likely as equivalent to having equity assets in stocks or other securities (even though it’s not technically a security itself).
Cashing In Crypto for Down Payments
What’s more common, says Heck, is consumers cashing out crypto holdings to cover their down payment. But even that comes with stipulations and major tax implications. If your lender allows this, funds must typically be transferred to a U.S. bank account within a certain window of time prior to submitting your application (check ahead of time what your lender requires) — and you’ll need a clean paper trail. You may also face a capital gains tax when you cash in your Bitcoin holdings.
Crypto Mortgage Payments
Last, to actually pay your mortgage in crypto, a lot would have to change. Most mortgage lenders currently accept payments via e-check, paper check, phone, and/or online bill pay. Each of these payment methods are set up for U.S. bank checking accounts, not for cryptocurrency.
Crypto is stored in hot wallets and cold wallets, which vary in accessibility and ease of use. Wallets have a public key, which is used to send and receive payments. Each wallet-holder also has a private key (similar to a bank password) to access and move around their money.
For Bitcoin mortgage payments to become mainstream, lenders would have to set up the appropriate technology to receive crypto payments easily from consumers who are used to paying through their bank. Not to mention, setting up the capability to send and receive crypto through escrow accounts pegged for taxes and insurance will involve communication through multiple third parties.
All this administrative overhaul will likely take at least a few years to streamline the process for everyone. The United Wholesale Mortgage test from August to October 2021 was the first of its kind, and the company determined the extra labor was not yet worth it for the small number of Americans interested in paying their mortgages with Bitcoin at the time.
How Bitcoin’s Volatility Complicates Things
Beyond the logistical details, Bitcoin is volatile. Just last year, in October 2020, Bitcoin was valued at $11,471, according to Coindesk’s Bitcoin tracker. More recently it hit a new all-time high price of more than $66,000.
While Bitcoin has significantly increased in value over the course of its 11-year history, its value varies greatly on a day to day basis. “This volatility poses a huge risk if you are looking to make regular monthly payments,” explains Nashville-based certified financial planner Jeanne Fisher. “Given the volatility with Bitcoin, paying a $1,000 mortgage payment could require drastically different amounts of Bitcoin on a monthly basis.”
Here’s a look at how Bitcoin’s value has fluctuated just over the past year:
|Date||Closing Price (USD)|
|Oct. 18, 2020||11,471.002547787|
|Nov. 18, 2020||17,834.6365337098|
|Dec. 18, 2020||23,890.8226488694|
|Jan. 18, 2021||36,346.6095022257|
|Feb. 18, 2021||51,728.5087967282|
|March 18, 2021||57,983.094743574|
|April 18, 2021||56,850.8301656893|
|May 18, 2021||43,196.046480024|
|June 18, 2021||35,520.4510340379|
|July 18, 2021||31,537.8051899688|
|Aug. 18, 2021||44,811.6341259938|
|Sept. 18, 2021||48,020.7563261237|
Bitcoin (BTC) was valued at $66,974 USD when this article was written — six times its value last year.
Using Fisher’s example of a $1,000 mortgage payment, last October you would have owed somewhere between .08 and .09 BTC. Today, you’d owe somewhere between .01 and .02 BTC. Imagine trying to set up automatic monthly payments for a 15- or 30-year mortgage with so much variability. It’s enough to make your head spin.
If you were to choose to cash out your Bitcoin holdings in time to pay your mortgage every month, you’d still likely owe taxes on the gains if Bitcoin grew in value from the time you made the original purchase.
Taxes for Bitcoin and cryptocurrency may evolve as the Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS) wrap their minds around the new asset class. But for now, we can look at the capital gains taxes already in place to see how buying and selling crypto at a profit would impact you tax-wise.
Capital gains taxes are calculated based on your income and how long you owned the asset or security before selling it for profit. If you held your crypto for longer than a year, then you would pay a long-term capital gains tax rate on any amount you make from the sale. For single filers, the capital gains tax rate is 0% if you earn up to $80,000 per year, 15% if you earn up to $441,450, and 20% if you make more than that, according to the IRS.
If you owned your crypto for less than 12 months, you would pay the same as your normal income tax rate on any profit.
The Bottom Line
Paying your mortgage with crypto doesn’t make much sense at the moment. As more passive crypto investment strategies emerge — such as the latest Bitcoin futures ETF that was recently approved — there may be more of a place for crypto in the everyday investor’s toolbox. But for now, crypto is best viewed as a speculative alternative investment making up a small portion of a portfolio.
Correction: An earlier version of this article incorrectly stated that Morty is a direct mortgage lender. Morty is an online mortgage marketplace.