Should you pay your mortgage with Bitcoin?

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Can 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 $ 60,000 each?

If you wanted to pay off your mortgage with Bitcoin, this is basically what you would do.

It’s been a big year for cryptocurrency, and consumers can buy more things than ever with crypto – although financial planners and other experts say they probably shouldn’t. Even mortgage lenders are starting to whisper that cryptocurrency payments are one 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 of paying their mortgage with crypto was “cool,” the company says, but ultimately kept their original payment method in good old-fashioned US dollars.

Paying things, and even mortgages, with cryptocurrency can be “cool,” but that doesn’t make it smart. Here’s what the experts have to say about paying off your mortgage with Bitcoin or other cryptocurrencies:

Should you pay your mortgage with Bitcoin?

No, to keep it simple. Cryptocurrency is a notoriously volatile and speculative asset to hold. Personal finance experts say it shouldn’t be more than 5% of your overall portfolio and not get in the way of other financial priorities like saving for emergencies, paying off high interest debt, or a strategy of conventional retirement.

Paying for things – including mortgages – with cryptocurrency is a bad idea fraught with unnecessary risk, these experts say. For starters, the price you pay for something today might not be what your purchase or payment will be worth tomorrow. In other words, a Bitcoin mortgage payment of $ 1,500 today could easily become a mortgage payment of $ 3,000 tomorrow.

Additionally, most companies that accept crypto start with the most popular cryptos like Bitcoin and Ethereum, which, due to their volatility, are particularly ill-suited for use for payments and purchases, experts say. While more innovation and stability in the future could change the dynamics, “we’re not there yet,” we were recently told 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 several ways for a borrower to use cryptocurrency in the mortgage process, says Robert Heck, origination manager at online mortgage lender Morty. Each route is subject to various state laws and regulations, and of course the policies differ from lender to lender, but here’s a general rundown.

Crypto as an asset

First, lenders are starting to recognize cryptocurrency as an asset when applying for your mortgage. You wouldn’t pay directly with your crypto assets, but they could be assessed as part of your mortgage application. When you apply for a mortgage, you list all of your properties, cash, and cash equivalents so lenders can determine how much you are qualified to borrow. Increasingly, Heck says, lenders can begin to view a person’s crypto holdings the same way they would see holdings in inventory.

Pro tip

Be prepared to pay capital gains taxes every time you sell your bitcoin holdings and make sure there is a proper paper trail if you plan to use the money for a down payment.

“It’s now an asset that is recognized by agencies,” says Heck. “It’s something that can be used during the conventional mortgage closing process. But that being said, it’s pretty early on.

Technically, crypto is liquid – meaning you can sell it quickly for cash – but since the value is so high and falling, lenders won’t consider it equal to having cash savings in an account. accessible. Still, crypto will likely count for something, most likely as the equivalent of having assets in stocks or other securities (although not technically a security in itself).

Cash in crypto for down payments

What’s more common, Heck says, are consumers who cash in crypto holdings to cover their down payment. But even that comes with major tax stipulations and implications. If your lender allows, funds usually need to be transferred to a US bank account within a certain amount of time before you submit your application (check in advance what your lender requires) – and you will need a paper trail. own. You may also face a capital gains tax when you cash out your Bitcoin holdings.

Crypto mortgage payments

Finally, to actually pay your mortgage in crypto, a lot would have to change. Most mortgage lenders currently accept payment by electronic check, paper check, telephone, and / or online bill payment. Each of these payment methods is configured for U.S. bank checking accounts, not 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 their money.

For Bitcoin mortgage payments to become mainstream, lenders would need to put in place the appropriate technology to easily receive crypto payments from consumers accustomed to paying through their bank. Not to mention that configuring the ability to send and receive cryptocurrencies through tax and insurance indexed escrow accounts will involve communication through multiple third parties.

This whole administrative overhaul will probably 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 that the extra work was not yet worth it for the small number of Americans interested in paying their mortgages with Bitcoin in the past. ‘era.

How Bitcoin’s volatility complicates matters

Beyond the logistical details, Bitcoin is volatile. Last year, in October 2020, Bitcoin was valued at $ 11,471, according to Coindesk’s Bitcoin tracker. Most recently, it hit a new all-time high of over $ 66,000.

While Bitcoin has risen significantly in value over its 11 year history, its value varies considerably from day to day. “This volatility poses a huge risk if you’re looking to make regular monthly payments,” says Jeanne Fisher, a certified financial planner based in Nashville. “Given the volatility with Bitcoin, paying a mortgage payment of $ 1,000 could require dramatically different amounts of Bitcoin on a monthly basis.”

Here’s a look at how Bitcoin’s value has fluctuated over the past year:

Date Closing price (USD) Oct. Nov 18, 20202011,471.002547787 Dec 18, 2017, 834.6365337098Dec. Jan 18, 2020 23,890.8226488694 18, 202136,346.6095022257 Feb. 18, 202151, 728.508796728218 March 202157,983.09474357418 April 202156,850.830165689318 May 202143,196.04648002418 June 202135,520.451034037918 July 202131,537.8051899688August. 18, 202144,811.6341259938sept. 18, 202148,020.7563261237 SOURCE: Coindesk

Bitcoin (BTC) was valued at US $ 66,974 at the time of writing, which is six times its value last year.

Using Fisher’s example of a mortgage payment of $ 1,000, last October you would have owed between 0.08 and 0.09 BTC. Today you owe between 0.01 and 0.02 BTC. Imagine trying to set up automatic monthly payments for a 15 or 30 year mortgage with such variability. It’s enough to make your head spin.

Tax considerations

If you were to choose to cash out your Bitcoin holdings in time to pay off your mortgage each month, you would likely still owe income taxes if the value of Bitcoin increased from the time you made the initial purchase.

Taxes on Bitcoin and cryptocurrency may change as the Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS) examine the new asset class. But for now, we can take a look at the capital gains taxes already in place to see how buying and selling crypto at a profit would impact your taxation.

Capital gains taxes are calculated based on your income and how long you held the asset or security before selling it for a profit. If you held your crypto for more than a year, 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 earn 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 tax rate on any profit.

The bottom line

Paying your mortgage with crypto doesn’t make a lot of sense right now. As more and more passive crypto investment strategies emerge – like the latest Bitcoin futures ETF that was recently approved – there may be more room for crypto in the daily investor’s toolbox. . But for now, crypto is best viewed as a speculative alternative investment constituting a small portion of a portfolio.

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