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Home Ownership Mortgage

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 contract that allows for additional availability of funds within the loan contract. If a clause for future advances is included in the loan contract then the borrower will be able to rely on receiving funds from the lender according to the terms of the contract without the need to take another loan to obtain additional funds. Future advance clauses could be void or have contingencies that make the borrower eligible to receive future advances.1

The most important takeaways

The term “future advance mortgage” refers to a loan that’s secured with an asset, such as property, or other assets.

Future advance mortgages allow for the transfer of additional money at a later date instead of fully disbursing the loan at closing.

The Home Equity loans along with home equity lines of credits (HELOCs) are two examples of future advance mortgages.

Future advance mortgages can be a problem for those who are not able to pay necessary payments, as the property or collateral can be taken from the loan provider in the case of default.

Understanding Future Advance

Future advances are considered as a factor in a variety 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 may also be integrated into non-revolving loans, allowing customers to segregate the funds they have been approved for to cut down on interest charges and manage cash flow.

If you take out a mortgage to buy a house, the house itself serves as collateral for the loan. Future advance loans could contain a clause that states that the house can also be used as collateral to loans that haven’t been granted yet. In effect future advance mortgages establish an obligation, or lien, or that is owed to the home in advance of any additional money taken against it.2

Note

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

Future Affirmation of a Mortgage

The home equity loans or home equity lines of credits (HELOCs) are two typical examples of future mortgages. When you take out an equity home loan the lender advances you a specific amount of money based upon 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

Home equity lines of credit are revolving lines credit that’s based on your house equity. This type of future advance is similar to a credit card in that you can use some from your credit line, and as you repay it, you are able to free up more credit. Home equity lines of credit generally come with variable interest rates however home equity loans tend to offer fixed rates.3

As an example, suppose you own $100,000 capital in the equity of your house. According to your loan-to value (LTV) ratio the lender may allow you to take out $50,000 from that equity via the home equity credit line. You’d then have to repay the line of credit to your home equity as well as the principal mortgage loan. You’d be able to draw for a 10-year period to tap into the money followed by a 20-year payment period that follows.

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

How Are Future Advances Used?

Future advances could be used to draw additional money from the loan. In mortgage loans, future advances may be used to fund the equity in your home loans or lines of credit. They can also serve as construction loans, for which the property that is the collateral for the loan isn’t built yet. Future advances permit you to receive the cash you need now without having to alter the original loan conditions.

Future advances also be utilized in business contexts. Businesses may also qualify for long-term loans to fund 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 benchmarks. The milestones could be as simple as meeting certain goals for growth in sales and earnings, or revenue.

Commercial lending contracts may allow for re-evaluation of credit terms, or for the broadening of principal balances that are not specified in amount. Commercial lenders may integrate loan clauses that permit re-evaluation after a specified amount of time. This gives incentives to customers to maintain their relationship with business lenders to potentially receive additional loans from the same lender in the near future.

Revolving Credit Advances

In a revolving credit account the borrower is able to access funds up to a specified limit at any given 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 revolving the outstanding funds in the account rather than obtaining an amount of principal in one lump sum.4

Revolving credit accounts will also typically offer cash advances. Typically, lenders set a specific cash advance limit for the account, which allows the borrower to directly withdraw cash for a small cash advance cost.

Consider the interest rate and charges that could 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 business loans. Companies may need future advance clauses to help with construction development as well as ongoing capital investments. Business loans with advance clauses for 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. This allows a borrower to rely on an approved principal amount from a specific loan product.

Construction firms typically use short-term loans that have future advance provisions to obtain funds at various points throughout the development of construction. Construction companies building in large development complexes might be able to arrange future advance loans with certain clauses that allow for real estate collaterals on specific tracts of land as the construction process is completed.

FAQs

What Is a Future Advance?

The term “future advance” refers to a clause in a loan contract that permits the borrower to obtain additional funds following the loan is initially disbursed. The future advances will be secured with collateral that could be an asset like a house, business property or any other asset.

Is a Home Equity Loan an Advance for the Future?

Home equity loans or home equity credit lines are both common examples of future advances. With either one, a lender is offering you cash based on the equity worth of your home. Future advances of either kind comes with its own loan conditions, but without altering what was agreed upon in the initial loan.

What happens if you default on a Future Advance?

Defaulting on a future advance could result in the lender taking control of the collateral secured by the loan. For instance, if you default on a home equity loan can cause you to risk losing your home to foreclosure.