An introduction to Crypto-backed mortgages

Mortgage is all about loan giving and settlement which have been happening in our traditional banking and financial institution. The way of giving out loan in traditional institutions like banks and others, require the borrower to have physical collateral that is worth more than the loan.

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People collect loans to start start-up businesses, buy properties, build houses and so on which collateral must be provided before the loan can be given to the borrower. In this, if the borrower fails to repay his/her loan the property of the borrower which serves as collateral would be seized by the financial institution that gives the loan to the borrower through a process called foreclosure.

In the crypto industry, the means of collecting loans differ from that of traditional financial institutions like banks. In the crypto industry, it is known as Crypto-backed mortgages which is a means through which crypto holders can collect loans using cryptocurrency as a collateral for the loan. What this simply means is that as a crypto holder, you can use your cryptocurrency as collateral to collect a loan. You can get access to liquidity without selling your cryptocurrencies.

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How a Crypto-backed mortgage works

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The way of getting a loan in the crypto industry is different from a traditional banking system. When it comes to Crypto-backed mortgages, the borrower who wants to collect a loan would have to pledge a certain amount of the crypto he/she is holding as collateral to get a loan from the lender first.

At this stage, the lender will then evaluate the borrower's cryptocurrency and that of the loan to know the value of the loan. Simply put loan to value ratio is what sets the percentage that the borrower would pay as collateral. The process is shown below.

➡️ Collateral Selection:
This is the first step where a borrower will select the Crypto that would be used as collateral to secure the loan

➡️ Evaluation by Lender:
At this step, the lender will then value the collateral of the borrower and determine the percentage the borrower will get.

➡️ Terms and conditions of loan:
At this point both the borrower and lender will have to agree to the terms and conditions of the loan, which includes fees and repayment date.

➡️ Locking of collateral:
This is the step where the borrower will have to transfer the chosen crypto to a smart contract or that which is held by the lender which serves as security for the loan.

➡️ Disbursement of loan:
Immediately the collateral is locked, the lender will then distribute the loan to the borrower which can be in Fiat currency, USDT, or other crypto like Steem etc

➡️ Loan Repayment:
This is the final stage where the loan is repaid by the borrower to the lender based on the terms condition and interest of the loan. At this stage, if the borrower fails to repay the loan, the lender will then have the full right to liquidate the borrower to recover his or her money.

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Conclusion

_{Crypto-backed mortgages is an easy means of securing loans using Cryptocurrency as collateral instead of using physical asset or property as collateral for collecting the loan. In this post, we have learned about Crypto-backed mortgages and how they work.}

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Disclaimer:

_{This post is educational, not investment advice or in any way telling you to opt in for loan collection through a crypto-backed mortgage when you don't understand how the system works. It is good that you conduct your research before thinking of collecting a loan via a mortgage. For more information, click the link below.}
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