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Mortgages 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 is a clause in a mortgage which provides the possibility of additional funds under the loan contract. If a future advance clause is included in a loan contract then the borrower can rely on the lender to provide funds lender according to the conditions of the contract, without being required to obtain another loan to acquire additional funds. Future advance clauses can contain or not contain certain requirements that make the borrower eligible to receive future advances.1

Key Takeaways

A future advance mortgage is an loan that’s secured with an asset, such as property, or other assets.

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

The Home Equity loans as well as home equity line of credit (HELOCs) are two examples of future advances mortgages.

Future advance mortgages can be difficult for borrowers who are unable to make required payments because collateral or property could be confiscated at the request of the lending institution in case in default.

Understanding Future Advance

Future advances are a consideration for a variety of loan products. In general, the concept 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 which allows clients to differentiate the funds they’ve been approved for to save on interest rate costs and manage cash flows.

When you get a mortgage to buy a house it is the house that serves as collateral for the loan. Future advance loans could include a clause that says that the property can be used as collateral for loans that haven’t been granted yet. In essence, future advance mortgages create a lien or underlying debt that is owed to the home prior to the issuance of any additional money taken against it.2

Note

A future advance isn’t the same thing as a cash advance or payday advances.

Future Affirmation of a Mortgage

Equity home loans or home equity lines of credits (HELOCs) can be described as two typical examples of future mortgages. When you take out a home equity loan the lender is advancing you a certain amount of money based upon the amount of equity you have in your home. This money is paid to you in a lump sum, which you must repay with interest.3

Home equity lines of credit are revolving lines 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 part of the credit line, and as you repay it, you are able to free up more credit. Credit lines for home equity generally come with variable interest rates however home equity loans typically have fixed rates.3

For instance, let’s say you have $100,000 of equity in your home. Based on your loan-to-value (LTV) ratio the lender may allow you to borrow $50,000 from that equity via an equity credit line. You’d then have to repay the line of credit to your home equity as well as the principal mortgage loan. There’s a 10-year draw period to draw money from the line, then a 20-year repayment period that follows.

Defaulting on the home equity line or the home equity credit line could expose you to losing the home to foreclosure.

What are the Future Applications of Advancement?

Future advances may allow you to withdraw additional money from a loan. In mortgage lending, future advances can be used to fund homes equity loans or credit lines. They may also be used as construction loans that are used to build a home that’s securing the loan isn’t yet constructed. Future advances permit you to obtain the money you require today without making any adjustments to the initial loan terms.

Future advances can also function in business settings. Businesses may also qualify for short-term loans to fund long-term growth products. Many lenders working with businesses can structure cash advances for the future in a way that is contingent upon meeting certain benchmarks. These milestones could include achieving certain estimates for sales growth and earnings, or revenue.

Commercial lending agreements may allow for re-evaluation on credit terms, or for the broadening of principal balances that are not specified in amount. Commercial lenders may integrate loan provisions that permit renewal after a specific duration of time. This can provide incentives for borrowers to maintain good relationship with business lenders in order to receive additional funding from the same lender in the future.

Revolving Credit Advances

In a revolving credit card, the borrower can access funds up to a specified limit at any time. Revolving credit accounts are either a credit card or line of credit account. For all types of accounts the borrower is reliant on revolving outstanding funds in the account rather than obtaining an amount of principal in a lump sum.4

Revolving credit accounts also usually offer cash advances. Usually, lenders will establish a specific cash advance limit for the account, which allows the borrower to directly withdraw money for a small advance fee.

Take note of the interest rate as well as charges that could be charged when you apply for an revolving credit advance.

Future Advances for Non-Revolving Credit

These clauses can be typically found in non-revolving business loans. Businesses might require future advance clauses to support the development of construction as well as ongoing capital investments. Businesses loans with advance clauses for the future 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. It allows the borrower to count on a principal amount of a certain loan product.

Construction companies will commonly use long-term loans which have advance terms for the future to obtain funds at various points throughout construction development. Construction companies who build large development complexes might be able to structure future advance loans by incorporating certain clauses that allow for real estate collaterals on specific tracts of land as construction work is completed.

FAQs

What is a Future Advance?

A future advance is a provision in a loan contract that permits the borrower to receive additional money after the loan is initially released. Advances in the future are secured by collateral that could be an asset like a house, business property, or other assets.

Can a Home Equity Loan be considered one that can be a future advance?

Home equity loans or home equity credit lines are common examples of advances in the future. In either case the lender offers you cash based on the equity value that your house has. A future advance of either type has its own loan terms, without modifying those of the initial loan.

What Happens If You Default on an Future Advance?

A default on a loan in the future could result in the lender seizing control of the collateral used to secure the loan. For instance, if you default on the home equity loan could expose you to the risk of losing the home to foreclosure.