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Mortgages for home ownership

Future Advance
By Julia Kagan
Updated March 24 2021
Read by Ebony Howard
Facts checked by Yarilet Perez
What is an Future Advance?

A future advance clause is one in a mortgage contract that allows the possibility of additional funds within the loan contract. If a clause for future advances is included in the loan contract, then the borrower is able to count on the lender to provide funds lender under the terms of the contract without the need to take another loan for additional funds. Future advance clauses could contain or not contain certain contingencies that make the borrower eligible for future advances.1
The most important takeaways

Future advance mortgages are a loan which is secured by property or another asset.
Future advance mortgages allow for additional funds to be transferred at a later date instead of disbursing the loan when the loan is closed.
home equity loans along with home equity lines of credits (HELOCs) are two examples of future advances mortgages.
Future advance mortgages can be a problem for those who are not able to pay required payments because collateral or property could be taken at the request of the lending institution in event in default.

Understanding Future Advance

Future advances are a consideration for a variety of loan products. In general, the concept of revolving credit lines is built on the expectation of having funds available for future advances. Future advance clauses could be incorporated into non-revolving loans that allow borrowers to separate the funds they've been approved for to save on interest rate expenses and control cash flow.

When you get a mortgage to buy a house, the house itself serves as collateral in the loan. Future advance loans can include a clause that says that the property can be used as collateral to loans that haven't yet been approved yet. In effect the future advance mortgage creates an obligation, or lien, or that is owed to the home 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 advances.
Future Advance Mortgage Example

Home equity loans and home equity lines of credit (HELOCs) comprise two popular examples of future advances. When you take out the home equity loan the lender advances you a particular amount of money based on the amount of equity you have in the home. This loan is made to you in a lump sum that 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 type of loan is most like credit cards because you are able to use a portion of your credit line and when you repay it, you can free up additional credit. Home equity lines of credit typically come with variable interest rates however home equity loans tend to offer fixed rates.3

For instance, let's say you have $100,000 in equity in your home. Based on your loan-to-value (LTV) ratio the lender may allow you to borrow $50,000 of that equity using an 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 to tap into the money and a 20-year repayment period that follows.

Defaulting on a home equity line of credit or mortgage equity loan may expose you to losing the home to foreclosure.
What is the use of future advances?

Future advances may allow you to withdraw additional money from a loan. In mortgage loans, future advances may fund homes equity loans or lines of credit. They can also serve as construction loans, for which the house that's secured by the loan isn't built yet. Future advances allow you to receive the cash you need now without having to modify the initial loan terms.

Future advances can also function in business settings. Businesses may also qualify for long-term loans to finance the long-term growth of their business. Many lenders working with businesses are able to structure future cash advances to be contingent on the achievement of certain milestones. The milestones could be as simple as meeting certain estimates for sales growth or revenue.

Commercial lending contracts may allow for re-evaluation of credit terms or broadened principal balances in an undetermined amount. Commercial lenders could incorporate loan clauses that permit re-evaluation after a specified duration of time. This can provide incentives for borrowers to maintain good relationship with business lenders so that they can receive additional loans from the same lender in the near future.
Revolving Credit Advances

In a revolving account, the borrower can access funds up to a certain limit at any point. Revolving credit cards can be either a credit or lines of credit accounts. For each type of account the borrower relies on revolving the outstanding funds in the account, rather than receiving the principal amount in one lump sum.4

Revolving credit accounts also typically include provisions for cash advances. Usually, lenders will establish a specific cash advance limit for the account. This allows the borrower to directly withdraw cash for a small cash advance cost.

Be aware of the interest rate and fees that might be charged when you take out an advance on credit that is revolving.
Future Advances for Non-Revolving Credit

The clauses for future advance are typically included in non-revolving commercial loans. Companies may need future advance clauses to help with construction development and ongoing capital projects. Businesses loans with future advance clauses can also be called term loans.

Similar to a revolving credit account, the term loan will provide the borrower with a maximum credit limit. This allows a borrower to rely on an approved principal amount of a certain loan product.

Construction companies will commonly use term loans which have advance terms for the future in order to get the funds they require at various times during the development of construction. Construction companies that are building large development complexes might be able to create future advance loans by incorporating certain clauses that allow for real estate collaterals for individual parcels of land once the construction process is completed.
FAQs
What is a Future Advance?

Future advances are a provision in the loan contract that allows the borrower to obtain additional funds after the loan is initially disbursed. Future advances are secured with collateral that could be the property of a business, a home or any other asset.
Can a Home Equity Loan be considered a Future Advance?

Equity home loans or home equity credit lines are typical examples of advances in the future. With either one lenders are offering you cash based on the equity worth that your house has. Future advances of either kind has its own loan conditions, and does not alter what was agreed upon in the original loan.
What happens if you default on a Future Advance?

Defaulting on a future advance could lead to the lender gaining control over the collateral used to secure the loan. For example, failing to pay the home equity loan could expose you to the risk of losing the home to foreclosure.
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Related Terms
Signature Loan
Signature loan is a type of personal loan offered by banks and other finance companies that depends solely on the signature of the borrower as well as a guarantee to pay the loan as collateral.
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Collateral Definition, Types, & Examples
Collateral is a property that is accepted by a lender as security in order to extend the loan. If the borrower is in default and the lender is unable to pay, it can seize the collateral.
more
Piggyback Mortgage
A piggyback mortgage could include any additional mortgage loan beyond a borrower's first mortgage loan that is secured by similar collateral.
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The Home Equity Program: What It is, How it Works, and How You Can Utilize It
Home equity is the sum of a home's market value less any liens that are attached to the home.
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What a home Equity Loan Works, Rates, Requirements & Calculator
A home equity loan is a kind of consumer loan that allows homeowners to borrow against the equity in their homes.
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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 draw money often up to a certain limit, while paying back in installments.
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