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What Is a Future Advance?
A future advance is a clause in a mortgage that provides for additional availability of funds under the loan contract. If a future advance clause is included in a loan contract then the borrower can rely on obtaining funds from the lender under the terms of the contract without being required to obtain another loan for additional funds. Future advance clauses may or may not have certain contingencies that make the borrower eligible for future advances.
Key Takeaways
- A future advance mortgage is a loan that’s secured with property or another asset.
- Future advance mortgages allow for additional funds to be transferred at a later date, rather than fully disbursing the loan at closing.
- Home equity loans and home equity lines of credit (HELOCs) are two examples of future advance mortgages.
- Future advance mortgages can be problematic for borrowers who are unable to make required payments because the property or collateral can be seized by the lender in the event of default.
Understanding Future Advance
A future advance can be a consideration for a variety of loan products. In general, the concept of revolving lines of credit is built on the expectation of available funds for futures advances. Future advance clauses may also be integrated into non-revolving loans, allowing borrowers to separate the funds they have been approved for in order to save on interest rate costs and manage cash flows.
When you get a mortgage to buy a home, the house itself serves as collateral for the loan. A future advance mortgage can include a clause stating that the house can also serve as collateral for loans that haven’t been granted yet. In effect, future advance mortgages create a lien or underlying debt obligation on the property ahead of any additional funds borrowed against it.
Note
A future advance is not the same thing as a cash advance or a payday advance.
Future Advance Mortgage Example
Home equity loans and home equity lines of credit (HELOCs) are two common examples of future advance mortgages. With a home equity loan, a lender is advancing you a certain amount of money based on the amount of equity you have in the home. This money is paid to you in a lump sum, which you must repay with interest.
A home equity line of credit is a revolving line of credit that’s based on your home equity accumulation. This type of future advance is most similar to a credit card in that you can use some of your credit line, and as you pay it back, you free up more available credit. Home equity lines of credit typically have variable interest rates, while home equity loans tend to offer fixed rates.
For example, say you have $100,000 in equity in your home. Based on your loan-to-value (LTV) ratio, your lender might allow you to borrow $50,000 of that equity using a home equity line of credit. You’d then have to repay the home equity line of credit as well as your primary mortgage loan. You’d have a 10-year draw period in which you could tap into the money, then a 20-year repayment period to follow.
Warning
Defaulting on a home equity line or home equity line of credit could put you at risk of losing the home to foreclosure.
How Are Future Advances Used?
Future advances can withdraw additional funds from a loan. In mortgage lending, future advances can fund home equity loans or lines of credit. They can also serve as construction loans, for which the home that’s securing the loan hasn’t been built yet. Future advances allow you to get money you need today without making any adjustments to the original loan terms.
A future advance can also function in business settings. Businesses may also qualify for term loans to fund long-term growth products. Many lenders working with businesses will structure future cash advances to be dependent on meeting certain milestones. Milestones may include meeting certain estimates for sales growth, revenue, or earnings.
Commercial lending deals may also allow for re-evaluation of credit terms or broadened principal balances of an undetermined amount. Commercial lenders may integrate loan provisions that allow for re-evaluation after a specified period of time. This gives incentives to borrowers to maintain good credit 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 can access funds up to a specified limit at any time. Revolving credit accounts can be either a credit card or line of credit account. For each type of account, the borrower relies on revolving outstanding funds in the account rather than obtaining a principal amount in a lump sum.
Revolving credit accounts will also typically have provisions for cash advances. Generally, lenders will set a specific cash advance limit for the account, which allows the borrower to directly withdraw cash for a small cash advance fee.
Important
Consider the interest rate and fees that may apply when taking out a revolving credit advance.
Non-Revolving Credit Future Advances
Future advance clauses are often included in non-revolving business loans. Businesses may require future advance clauses to support construction development or ongoing capital investment projects. Business loans with future advance clauses may also be known as term loans.
Similar to a revolving credit account, a term loan will provide a borrower with a maximum credit limit. This allows a borrower to rely on an approved principal amount from a specific loan product.
Construction companies will commonly use term loans with future advance clauses to obtain funds at various points throughout construction development. Construction companies building in large development complexes may also be able to structure future advance loans with certain provisions that can integrate real estate collateral on individual tracts of land as building construction is completed.
FAQs
What Is a Future Advance?
A future advance is a clause in a loan contract that allows the borrower to receive additional funds after the loan is initially disbursed. Future advances are secured by collateral, which may include a home, business property, or other assets.
Is a Home Equity Loan a Future Advance?
Home equity loans and home equity lines of credit are common examples of future advances. With either one, a lender is offering you money based on the equity value of your home. A future advance of either type has its own loan terms, without modifying the terms of the original loan.
What Happens If You Default on a Future Advance?
Defaulting on a future advance could result in the lender seizing control of the collateral that secured the loan. For example, defaulting on a home equity loan can put you at risk of losing the home to foreclosure.