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Mortgage for Home Ownership

Future Advance

By Julia Kagan

Updated March 24 2021

Review by Ebony Howard

Fact checked by Yarilet Perez

What is a Future Advance?

A future advance clause is one in a mortgage that provides an additional source of funds in the loan contract. If a future advance clause is included in the loan contract then the borrower can rely on receiving funds from the lender in accordance with the conditions of the contract, without having to seek another loan to obtain additional funds. Future advance clauses may contain or not contain certain requirements that make the borrower eligible for future advances.1

Important Takeaways

Future advance mortgages are an loan that is secured by an asset, such as property, or other assets.

Future advance mortgages allow for more funds that can be transferred later on at a later time instead of disbursing the loan upon closing.

home equity loans along with home equity lines of credits (HELOCs) can be considered two types of advance mortgages.

Future advance mortgages may be a problem for those who aren’t able to make necessary payments due to the fact that collateral or the collateral may be taken by the lender in the case of default.

Understanding Future Advance

A future advance can be a consideration for a variety of loan products. In general, the concept of revolving lines of credit is built on the expectation of funds available for futures advances. Future advance clauses can also be integrated into non-revolving loans, allowing borrowers to separate the funds they’ve been approved for to save on interest rate costs and manage cash flows.

If you take out a mortgage to purchase a house, the house itself serves as collateral for the loan. A future advance mortgage can contain a clause that states that the property can be used as collateral to loans which haven’t been approved yet. In essence, future advance mortgages create an obligation, or lien, or obligation on the property ahead of any additional money taken against it.2

Note

A future advance isn’t the same thing as a cash advance or a payday advance.

Future Loan Example of Advance Mortgage

Home equity loans as well as home equity line of credit (HELOCs) comprise two popular examples of future advances. With the home equity loan the lender advances you a particular amount of money based on the equity that you own in your home. This loan is made to you in a lump sum, which you must repay with interest.3

A home equity line of credit is a revolving line credit that is based on your home equity accumulation. This kind of advance is most like credit cards in that you are able to use a portion of your credit line, and, as you pay it back, you can free up additional credit. Home equity lines of credit typically have variable interest rates, and home equity loans generally have fixed rates.3

For example, say you have $100,000 of capital in the equity of your house. In accordance with your loan-to-value (LTV) ratio, your lender might allow you to take out $50,000 of the equity through a home equity line of credit. Then you’d have to repay the home equity line of credit along with your mortgage loan. You’d have a 10-year draw period to tap into the money followed by a 20-year payment period that follows.

Defaulting on a home equity line of credit or mortgage equity loan may expose you to losing the home to foreclosure.

What is the use of future advances?

Future advances can withdraw additional funds from a loan. In mortgage lending, future advances could be used to fund homes equity loans or lines of credit. They also can be used as construction loans, for which the house that’s secured by the loan hasn’t been built yet. Future advances permit you to receive the cash you need now without making any adjustments to the initial loan conditions.

Future advances also be utilized in business contexts. Businesses could also be eligible for long-term loans to finance the long-term growth of their business. A lot of lenders who work with businesses can structure cash advances for the future in a way that is contingent upon meeting certain goals. These milestones could include achieving certain expectations for growth in sales, revenue, or earnings.

Commercial lending deals may also allow for re-evaluation of credit terms, or for the broadening of principal balances that are not specified in amount. Commercial lenders can incorporate loan provisions that allow for renewal after a specific period of time. This provides incentives for the borrowers to keep good relationship with business lenders to potentially get additional funds from the same lender in the future.

Revolving Credit Advances

In a revolving account the borrower has access to funds up to a certain limit at any time. Revolving credit cards can be either a credit card or a the line of credit. For all types of accounts the borrower relies on the ability to revolve outstanding funds within the account, rather than receiving an amount of principal in a lump sum.4

Revolving credit cards will generally include provisions for cash advances. Generally, lenders will set a specific cash advance limit for the account, which permits the borrower to withdraw cash in exchange for a modest cash advance cost.

Take note of the interest rate as well as fees that may apply when you apply for a revolving credit advance.

Future Advances on Non-Revolving Credit

These clauses can be usually included in non-revolving business loans. Businesses might require future advance clauses in order to fund construction projects and ongoing capital projects. Businesses loans with future advance clauses can also be called term loans.

Similar to a revolving credit account, an unsecured term loan will provide a borrower with a credit limit of up to. It allows the borrower to rely on an approved principal amount from a particular loan product.

Construction companies typically make use of short-term loans that have future advance provisions in order to get funds at various points throughout construction. Construction companies building in huge development complexes may be able to create future advance loans with certain provisions that can integrate real estate collaterals for individual tracts of land as construction work is completed.

FAQs

What is a Future Advance?

The term “future advance” refers to a clause in the loan contract that permits the borrower to obtain additional funds following the loan is first released. Future advances are secured with collateral that could be the property of a business, a home or any other asset.

Can a Home Equity Loan be considered an Advance for the Future?

Equity home loans and home equity lines of credit are common examples of future advances. With either one, a lender is offering you money based on the equity value of your home. The future advance of any kind comes with its own loan terms, without modifying the terms of the initial loan.

What happens if You default on the terms of a Future Advance?

In the event of a default on a future loan, it could lead to the lender seizing control of the collateral secured by the loan. For example, defaulting on the home equity loan could expose you to the risk of losing the home to foreclosure.

KAS

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