What Is a Future-Advance Mortgage?

Future-Advance Mortgages Explained in Less Than 4 Minutes

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A future-advance mortgage involves a clause that allows a borrower to borrow extra money and increase their mortgage loan in the future. They are common among construction and commercial loans.

Let’s take a closer look at what a future-advance mortgage is and how it works so you can determine if it’s a good option for your situation. 

Definition and Example of a Future-Advance Mortgage

When you take out a traditional mortgage, you use the funds to purchase a property. With a future-advance mortgage, you purchase the property with the initial part of the loan and receive more money at a later time to meet various goals. If you pursue a future-advance mortgage, you will notice a clause in your loan documents that clearly outlines the following:

  • The day the future advance is made
  • The lender and the borrower’s names and contact details
  • The amount of the advance

A future-advance mortgage may be optional or obligatory depending on the lender and loan agreement.

How a Future-Advance Mortgage Works

The best way to understand how future-advance mortgages work is to understand the different types that are available to borrowers. That being said, future-advance mortgages are similar to standard mortgages, in that you have to apply for one and your application approval hinges on various factors like your income, debt, and credit scores.

Construction Mortgages

If you have plans to build a house, you may take out a construction mortgage. With this product, you use the initial payment to purchase the land. Then, you borrow more money to cover the building costs as your contractor or builder makes progress on your house. 

In some cases, payments on construction loans begin six to 24 months after the loan has been finalized. Depending on the lender, you might be able to repay the balance in a lump sum or convert the loan into a conventional mortgage.

If your home building project can’t be completed with the remaining funds of your construction mortgage, the lender may put it into foreclosure, take over the project, complete it, and sell it. However, a lender might forego the foreclosure option and work with you to fund the rest of the project.

Commercial Real Estate Loans

Commercial real estate loans might also contain future-advance obligations. These obligations can help a business owner pay for the cost of various scenarios in which they may need cash after you close. They may want to acquire new collateral or pay for capital expenditures at a later time, for example. If you’re a business owner and you’re unsure of when you’ll need more money, a future-advance can give you some flexibility so you don’t have to pay interest until you actually use the funds.

Home Equity Loans and HELOCs

Home equity loans and lines of credit (HELOCs) allow you to tap into your home equity (the difference between what you owe on your mortgage and your home’s current value) to meet various financial needs. HELOCs, in particular, are a good example of a considered a future-advance mortgage since you tap into your credit line to get funding for future uses.

Pros and Cons of a Future-Advance Mortgage

Before you move forward with a future-advance mortgage, keep these advantages and drawbacks in mind. 

Pros
  • Can save you interest costs

  • Offers flexible funding

Cons
  • May be confusing

  • Your home is collateral

Pros

  • Can save you on interest: Since you’ll receive the additional funds only when you need them, a future-advance mortgage may save you a significant amount of money on interest. This can add to thousands or even tens of thousands of dollars in savings.
  • Offers flexible funding: For new-construction homes, a funding rollout means you’ll get your money when you need to pay for certain phases of the project without the need to get a new mortgage. 

Cons

  • May be confusing: Before you take out a future-advance mortgage, make sure you read the fine print. This type of product is usually more complex and difficult to understand than a typical mortgage. 
  • Your home is collateral: In the case of HELOCs and home equity loans, your house is used as collateral. If you stop making payments on the money you borrowed, your lender could foreclose on your home.

Key Takeaways

  • A future-advance mortgage contains a clause that permits a borrower to receive more money after the initial agreement has been made.
  • Some examples of future-advance mortgages include construction mortgages, commercial real estate loans, and HELOCs.
  • While a future-advance mortgage can be convenient and save you some money on interest, its terms may be confusing and it may tempt you to overspend. 

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