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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 contract that allows an additional source of funds in the loan contract. If a future advance clause is included in a loan contract, the borrower can rely on receiving funds from the lender under the clauses of the contract without the need to take another loan to obtain additional funds. Future advance clauses can contain or not contain certain conditions that allow the borrower to be eligible to receive future advances.1

Key Takeaways

A future advance mortgage is a loan that is secured by an asset, such as property, or other assets.

Future advance mortgages allow additional funds to be transferred at a later date instead of disbursing the loan at closing.

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

The future advance mortgage can be problematic for borrowers who are unable to make necessary payments due to the fact that the property or collateral can be taken at the request of the lending institution in event of default.

Understanding Future Advance

Future advances can be a consideration for a variety of loan products. In general, the idea of revolving lines of credit is built on the expectation of available funds to fund future advances. Future advance clauses may also be integrated into non-revolving loans, allowing borrowers to separate the money they’ve been approved for to cut down on interest expenses and control cash flow.

When you get a mortgage to purchase a house it is the house that serves as collateral for the loan. The future mortgage may include a clause that says that the property can be used as collateral to loans that haven’t been granted yet. In effect future advance mortgages establish a lien or underlying debt obligation on the property in advance of any other funds that are that are borrowed against it.2

Note

Future advances are not the same thing as a cash loan or payday advance.

Future Advance Mortgage Example

Equity home loans and home equity lines of credit (HELOCs) comprise two common examples of future mortgages. With the home equity loan, a lender is lending you a certain amount of money, based on the amount of equity you own in your home. The money is then paid to you in a lump sum, which you have to repay with interest.3

The home equity line is an revolving line of credit that’s based on your home equity. This type of loan is most like a credit card in that you can make use of your credit line and, as you pay it back, you free up more available credit. Home equity lines of credit usually have variable interest rates, and home equity loans generally have fixed rates.3

For example, say you own $100,000 property equity. In accordance with your loan-to-value (LTV) ratio your lender may permit you to borrow $50,000 from that equity via a home equity credit line. You’d then have to repay the line of credit to your home equity in addition to your mortgage loan. You’d be able to draw for a 10-year period during which you can access the funds followed by a 20-year payment period to follow.

In defaulting on the home equity line or mortgage equity loan can put you at risk of losing your home to foreclosure.

How Are Future Advances Used?

Future advances can withdraw additional money from a loan. In mortgage lending, future advances can be used to fund home equity loans or credit lines. They can also serve as construction loans, for which the property that is the collateral for the loan isn’t built yet. Future advances allow you to receive the cash you need now without having to modify the original loan terms.

Future advances also function in business settings. Businesses might also be eligible for term loans to fund long-term growth strategies. Many lenders working with businesses can structure cash advances for the future to be contingent on the achievement of certain goals. These milestones could include achieving certain goals for growth in sales and earnings, or revenue.

Commercial lending contracts may permit a re-evaluation of credit terms, or for the broadening of principal balances of an undetermined amount. Commercial lenders could incorporate loan provisions that permit an evaluation to be re-evaluated after a certain period of time. This can provide incentives for the borrowers to keep good relationships with business lenders so that they can receive additional loans from the same lender in the future.

Revolving Credit Advances

In a revolving account the borrower is able to access funds up to a certain limit at any time. Revolving credit accounts can be either a credit card or lines of credit accounts. For each type of account, the borrower relies on revolving outstanding funds in the account, rather than receiving a principal amount in a lump sum.4

Revolving credit cards will typically offer cash advances. Usually, lenders will establish an advance limit for the account. This allows the borrower to take out cash for a small cash advance cost.

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

Future Advances for Non-Revolving Credit

Future advance clauses are typically included in non-revolving business loans. Businesses might require future advance clauses to support construction development or ongoing capital investment projects. Businesses loans that have advance clauses in the future may also be known as term loans.

Similar to a revolving loan account, a term loan will provide the borrower with a credit limit of up to. The borrower can rely on an approved principal amount of a certain loan product.

Construction firms typically use term loans that have future advance provisions to access funds at various points throughout construction. Construction companies that are building huge development complexes may be able to arrange future advance loans with certain conditions that permit the integration of real estate collaterals for individual tracts of land as the construction process is completed.

FAQs

What Is a Future Advance?

The term «future advance» refers to a provision in the loan contract that allows the borrower to obtain additional funds after the loan is initially disbursed. Advances in the future are secured with collateral, which could include the property of a business, a home or other assets.

Is a Home Equity Loan an Advance for the Future?

Equity home loans or home equity credit lines are both common examples of advances in the future. In either case lenders are offering you money based on equity worth of your home. A future advance of either kind has its own loan conditions, and does not alter the terms of the original loan.

What Happens If You Default on a Future Advance?

In the event of a default on a future loan, it could result in the lender taking control of the collateral used to secure the loan. For example, defaulting on a home equity loan could expose you to the risk of losing your property to foreclosure.

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