Mortgage for Home Ownership
Future Advance
By Julia Kagan
Updated March 24, 2021
Review by Ebony Howard
Facts checked by Yarilet Perez
What Is a Future Advance?
A future advance is a clause in a mortgage that provides an additional source of funds under the loan contract. If a future advance clause is included in the loan contract, the borrower will be able to rely on obtaining funds from the lender in accordance with the conditions of the contract, without being required to obtain another loan to obtain additional funds. Future advance clauses can be void or have contingencies that make the borrower eligible to receive future advances.1
Important Takeaways
The term «future advance mortgage» refers to an loan that’s secured with property or another asset.
Future advance mortgages allow additional funds to be transferred at a later time, rather than fully making the loan upon closing.
The Home Equity loans along with home equity lines of credits (HELOCs) provide two examples of future advances mortgages.
Future advance mortgages can be problematic for borrowers who are not able to pay necessary payments, as the property or collateral can be confiscated by the lender in the event of default.
Understanding Future Advance
A future advance can be considered as a factor in a variety types of loan products. In general, the idea of revolving lines of credit is based on the anticipation of funds available for futures advances. Future advance clauses can be added to non-revolving loans which allows clients to differentiate the funds they have been approved for in order to reduce interest charges and manage cash flow.
When you get a mortgage to buy a house, the house itself serves as collateral for the loan. The future mortgage can include a clause stating that the home can be used as collateral to loans that haven’t been granted yet. In effect the future advance mortgage creates an obligation, or lien, or obligation on the property prior to the issuance of any other funds that are taken against it.2
Note
A future advance is not the same thing as a cash advance or a payday advance.
Future Loan Example of Advance Mortgage
Equity home loans or home equity lines of credits (HELOCs) comprise two common examples of future advance mortgages. When you take out the home equity loan the lender is lending you a particular amount of money based upon the equity that you own in your home. The money is then paid to you in one lump sum, which 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. This kind of advance is most similar to a credit card in that you can make use from your credit line and as you repay it, you free up more available credit. Home equity lines of credit generally offer variable interest rates however home equity loans tend to offer fixed rates.3
As an example, suppose you have $100,000 in equity in your home. According to your loan-to value (LTV) ratio the lender may allow you to borrow $50,000 from that equity via the home equity credit line. Then, you’ll have to pay back the home equity line of credit as well as your primary mortgage loan. There’s a 10-year draw period in which you could draw money from the line and a 20-year repayment period to follow.
Defaulting on a home equity line of credit or the home equity credit line can put you at risk of losing the home to foreclosure.
How Are Future Advances Used?
Future advances may allow you to withdraw additional money from a loan. In mortgage lending, future advances can be used to fund the equity in your home loans or lines of credit. They may also be used as construction loans where the home that’s securing the loan isn’t yet constructed. Future advances permit you to receive the cash you need now without making any adjustments to the original loan terms.
Future advances can also function in business settings. Businesses might also be eligible for short-term loans to finance the long-term growth of their business. Numerous lenders who work with companies will structure future cash advances to be dependent on meeting certain milestones. The milestones could be as simple as meeting certain expectations for growth in sales or revenue.
Commercial lending contracts may permit a re-evaluation of credit terms or broadened principal balances of an undetermined amount. Commercial lenders could incorporate loan clauses that permit re-evaluation after a specified duration of time. This can provide incentives for the borrowers to keep good relationship with business lenders so that they can get additional funds from the same lender in the near future.
Revolving Credit Advances
In a revolving credit card the borrower has access to funds to the extent of a predetermined limit at any time. Revolving credit cards can be either a credit card or lines of credit accounts. For each type of account the borrower is reliant on the ability to revolve outstanding funds within the account instead of obtaining an amount of principal in one lump sum.4
Revolving credit cards will usually offer cash advances. Typically, lenders set an advance limit for the account, which permits the borrower to directly withdraw money for a small advance cost.
Be aware of the interest rate and charges that could be charged when you take out an revolving credit advance.
Future Advances for Non-Revolving Credit
Future advance clauses are often found in non-revolving business loans. Businesses might require future advance clauses to support the development of construction and ongoing capital projects. Business loans that have advance clauses in the future could also be referred to as term loans.
Similar to a revolving loan account, a term loan can provide the borrower with a maximum credit limit. It allows the borrower to count on a principal amount of a certain loan product.
Construction firms typically use term loans with future advance clauses to access money at different points during construction. Construction companies building in huge development complexes may be able to structure future advance loans with certain conditions that permit the integration of real estate collaterals on specific tracts of land as the construction process is completed.
FAQs
What is an Future Advance?
The term «future advance» refers to a provision in a loan contract that allows the borrower to obtain additional funds following the loan is initially paid. Future advances are secured with collateral, which may include a home, business property or any other asset.
Are Home Equity Loans an Advance for the Future?
Equity home loans as well as home equity line of credit can be common examples of future advances. With either lenders are offering you money based on the equity value in your property. The future advance of any kind has its own loan conditions, but without altering what was agreed upon in the original 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 result in the lender seizing control of the collateral that secured the loan. For example, failing to pay the home equity loan could cause you to risk losing the property to foreclosure.
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Related Terms
Signature Loan
A signature loan is a personal loan that banks as well as other finance companies. It relies only on the signature of the borrower as well as a commitment to pay collateral.
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Collateral Definition, Types, & Examples
Collateral is an asset that lenders accept as security in order to extend a loan. If the borrower defaults and the lender is unable to pay, it can seize the collateral.
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Piggyback Mortgage
A piggyback mortgage could include any other mortgage loan in addition to the first mortgage loan that is secured with identical collateral.
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The Home Equity Program: What It is, How It Functions, and How You Can Use It
home equity refers to measurement of a home’s current market value less any liens attached to that home.
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How a Home Equity Loan Functions, Rates, Requirements & Calculator
A home equity loan is a type of consumer loan which allows homeowners to take out a loan against their equity in their house.
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What Is Revolving Credit, and How Does It Work (With Examples)?
Revolving credit is an arrangement which allows the account holder to borrow money frequently up to a predetermined limit while repaying in installments.
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