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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 an Future Advance?

A future advance clause is one in a mortgage that provides the possibility of additional funds under the loan contract. If a clause for future advances is included in the loan contract then the borrower can rely on receiving funds from the lender according to the terms of the contract without being required to obtain another loan to obtain additional funds. Future advance clauses may or may not have certain conditions that allow the borrower to be eligible for future advances.1

Key Takeaways

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

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

home equity loans as well as home equity line of credit (HELOCs) provide two examples of future advance mortgages.

The future advance mortgage can be problematic for borrowers who aren’t able to make necessary payments due to the fact that the property or collateral can be taken from the loan provider in the event of default.

Understanding Future Advance

Future advances can be a consideration for a variety of loan products. In general, the concept of revolving credit lines is built on the expectation of having funds available for future advances. Future advance clauses could be added to non-revolving loans which allows borrowers to separate the money they’ve been granted approval for in order to save on interest rate charges and manage cash flow.

If you take out a mortgage to buy a house it is the house that serves as collateral in the loan. Future advance loans can include a clause that says that the house can also be used as collateral to loans that haven’t yet been approved yet. In essence, future advance mortgages create an underlying lien or obligation on the property prior to the issuance of any additional funds that are borrowed against it.2

Note

A future advance is not the same thing as a cash advance , or payday advances.

Future Advance Mortgage Example

The home equity loans or home equity lines of credits (HELOCs) are two typical examples of future mortgages. With the home equity loan the lender is advancing you a certain amount of money, based on the amount of equity you own in your home. This money is paid to you in one lump sum that you have to repay with interest.3

A home equity line of credit is a revolving line of credit that’s based on your home equity accumulation. This kind of advance is most similar to a credit card in that you are able to use a portion part of the credit line, and as you pay it back, you free up more available credit. Credit lines for home equity typically have variable interest rates, and home equity loans generally have fixed rates.3

For example, say you own $100,000 equity in your home. According to your loan-to value (LTV) ratio the lender may allow you to borrow $50,000 of that equity using a home equity line of credit. Then, you’ll have to pay back the home equity line of credit as well as your mortgage loan. You’d be able to draw for a 10-year period during which you can draw money from the line followed by a 20-year payment period that follows.

Defaulting on the home equity line or mortgage equity loan may be a risk of losing your home due to foreclosure.

What is the use of future advances?

Future advances may allow you to withdraw additional money from the loan. In mortgage loans, future advances may be used to fund homes equity loans or lines of credit. They may also be used as construction loans, for which the home that’s securing the loan hasn’t been built yet. Future advances let you obtain the money you require today without having to alter the initial loan terms.

Future advances can also be utilized in business contexts. Businesses might also be eligible for short-term loans to help finance long-term growth products. Many lenders working with businesses are able to structure future cash advances in a way that is contingent upon meeting certain benchmarks. These milestones could include achieving certain goals for growth in sales or revenue.

Commercial lending deals may also permit a re-evaluation of credit terms or broader principal balances in an undetermined amount. Commercial lenders could incorporate loan provisions that permit re-evaluation after a specified amount of time. This provides incentives for customers to maintain their relationships with business lenders to potentially receive additional loans 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 accounts can be either a credit card or a lines of credit accounts. For all types of accounts the borrower is reliant on the ability to revolve outstanding funds within the account instead of obtaining a principal amount in one lump sum.4

Revolving credit cards will usually have provisions for cash advances. Usually, lenders will establish a specific cash advance limit for the account, which allows the borrower to directly withdraw cash in exchange for a modest cash advance cost.

Consider the interest rate and fees that might be charged when taking out an advance on credit that is revolving.

Non-Revolving Credit Future Advances

Future advance clauses are usually included in non-revolving commercial loans. Businesses may require future advance clauses to help with construction development or ongoing capital investment projects. Businesses loans with advance clauses for the future may also be known as term loans.

Like a revolving credit account, an unsecured term loan will provide a borrower with a credit limit of up to. This allows a borrower to depend on a pre-approved principal amount from a particular loan product.

Construction companies typically make use of short-term loans with future advance clauses to obtain the funds they require at various times during construction development. Construction companies who build large development complexes may also be able to create future advance loans by incorporating certain provisions that can integrate real estate collateral on individual parcels of land once the construction process is completed.

FAQs

What is an Future Advance?

A future advance is a provision in the loan contract that allows the borrower to obtain additional funds following the loan is initially paid. The future advances will be secured by collateral that could be a home, business property or other assets.

Are Home Equity Loans a Future Advance?

Home equity loans as well as home equity line of credit can be common examples of advances in the future. With either lenders are offering you money based on equity value that your house has. A future advance of either kind has its own loan conditions, but without altering the terms of the original loan.

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

A default on a loan in the future could lead to the lender taking control of the collateral that secured the loan. For instance, if you default on a home equity loan can cause you to risk losing the property to foreclosure.

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