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Mortgage for Home Ownership

Future Advance

By Julia Kagan

Updated March 24, 2021

Read by Ebony Howard

Fact checked by Yarilet Perez

What Is a Future Advance?

A future advance is a clause in a mortgage which provides the possibility of additional funds within the loan contract. If a future advance clause is included in the loan contract, then the borrower will be able to rely on obtaining funds from the lender under the conditions of the contract, without being required to obtain another loan to obtain additional funds. Future advance clauses may contain or not contain certain requirements that make the borrower eligible to receive future advances.1

Important Takeaways

Future advance mortgages are a loan which is secured by property or another asset.

Future advance mortgages permit additional funds to be transferred at a later date, rather than fully paying the loan at closing.

Home equity loans and home equity lines of credit (HELOCs) can be considered two examples of future advances mortgages.

Future advance mortgages can be a problem for those who are unable to make necessary payments due to the fact that collateral or the collateral may be confiscated by the lender in the event in default.

Understanding Future Advance

Future advances can be considered as a factor in a variety types of loan products. In general, the concept of revolving lines of credit is based on the assumption of available funds to fund future advances. Future advance clauses can be incorporated into non-revolving loans, allowing clients to differentiate the funds they have been approved for to cut down on interest costs and manage cash flows.

If you take out a mortgage to purchase a house it is the house that serves as collateral to the loan. The future mortgage may include a clause stating that the property can serve as collateral for loans which haven’t been approved yet. In effect, future advance mortgages create an underlying lien or commitment on the house ahead of any other funds that are borrowed against it.2

Note

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

Future Loan Example of Advance Mortgage

Equity home loans and home equity lines of credit (HELOCs) comprise two common examples of future advances. When you take out an equity home loan the lender is lending you a particular amount of money based upon the equity that you own in your home. This loan is made to you in a lump sum that you must repay with interest.3

A home equity line of credit is a revolving line credit that’s based on your home equity accumulation. This kind of advance is most similar to credit cards in that you can make use part of the credit line and as you pay it back you can free up additional credit. Home equity lines of credit generally have variable interest rates, however home equity loans generally have fixed rates.3

As an example, suppose you have $100,000 of capital in the equity of your house. Based on your loan-to-value (LTV) ratio, your lender might allow you to take out $50,000 of the equity through an equity line of credit. You’d then have to repay the home equity line of credit in addition to your mortgage loan. There’s a 10-year draw period in which you could tap into the money followed by a 20-year payment time frame to follow.

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

What are the Future Applications of Advancement?

Future advances could be used to draw additional funds from the loan. In mortgage loans, future advances may be used to fund the equity in your home loans or credit lines. They can also serve as construction loans that are used to build a house that’s secured by the loan isn’t yet constructed. Future advances allow you to receive the cash you need now without having to modify the initial loan conditions.

Future advances can also function in business settings. Businesses could also be eligible for long-term loans to help finance the long-term growth of their business. Many lenders working with businesses can structure cash advances for the future to be dependent on meeting certain milestones. These milestones could include achieving certain goals for growth in sales, revenue, or earnings.

Commercial lending agreements may allow for re-evaluation of credit terms or broadened principal balances that are not specified in amount. Commercial lenders could incorporate loan provisions that allow for renewal after a specific duration of time. This can provide incentives for the borrowers to keep good relationships with business lenders to potentially receive additional funding from the same lender in the future.

Revolving Credit Advances

In a revolving credit account the borrower is able to access funds to the extent of a predetermined limit at any given time. Revolving credit accounts can be either a credit card or a the line of credit. For all types of accounts, the borrower relies on revolving the outstanding funds in the account, rather than receiving an amount of principal in a lump sum.4

Revolving credit accounts also usually offer cash advances. Usually, lenders will establish the amount of cash advances for the account. This allows the borrower to take out cash in exchange for a modest cash advance cost.

Take note of the interest rate as well as charges that could be charged when you take out an advance on credit that is revolving.

Non-Revolving Credit Future Advances

Future advance clauses are typically included in non-revolving commercial loans. Businesses might require future advance clauses to help with construction projects or ongoing capital investment projects. Businesses loans that have advance clauses in the future can also be called term loans.

Similar to a revolving loan account, a term loan will provide the borrower with a credit limit of up to. It allows the borrower to count on a principal amount of a certain loan product.

Construction companies typically make use of long-term loans with future advance clauses in order to get funds at various points throughout construction development. Construction companies building in huge development complexes may be able to arrange future advance loans by incorporating certain clauses that allow for real estate collateral on individual tracts of land as building construction 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 money after the loan is first paid. 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 a Future Advance?

The home equity loans as well as home equity line of credit can be typical examples of future advances. With either one lenders are offering you cash based on the equity worth in your property. The future advance of any type has its own loan conditions, and does not alter the terms of the initial loan.

What Happens If You Default on an Future Advance?

Defaulting on a future advance could result in the lender seizing 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 the property to foreclosure.