Future advance mortgages are lines of credit that are secured with a piece of property or other asset. These loans secure property for future credit that is not fully disbursed at loan closing. The term "future advance" encompasses several forms of credit, each of which has different terms for different borrowers.
Mortgages that have a "future advance" clause provide for the availability of additional future funds under a line of credit, typically for home improvements or new construction.
Home Equity Loans
Home equity lines of credit, or HELOCs, are future advance mortgages. These types of loans are more common for individual borrowers. A HELOC can be taken out for, say, $50,000, and the borrower can take any or all of the money upfront and leave the credit line open. These types of loans are common for those doing home improvements on homes.
Construction Future Advance Mortgages
Constructions loans are financed on pieces of land where a borrower or borrowers intend to build a piece of real estate. The lender and borrower work together to develop a budget for the home construction, agree upon a loan amount and then finance a future advance mortgage that the borrower can access when he needs supplies or needs to pay laborers to build.
Business Future Advance Mortgages
Sometimes future advance mortgages are financed using a business as collateral. These loans often are used to finance research and development, innovation, reinvestment and to make payroll each month. Usually lenders only grant business advance mortgages to business owners who have a positive track record of on-time payments and strong business revenues.
Commercial Future Advance Mortgages
Real estate investors often take advantage of commercial loan advance mortgages. For example, if a developer has purchased a large swath of land that he or she intends to turn into a neighborhood, he or she could secure a commercial development line of credit (usually for multiple millions) with which he or she can use for property construction. Again, these loans are often only granted to those with a strong record of profitable developments.
Downside of Future Advance Mortgages
For individuals especially, future advance mortgages can be dangerous. Lines of credit require the borrower to make payments on the outstanding balance of the loan. Any borrower must be capable of repaying the loan even if the full advance is taken off the line. Also, the repayment on future advance mortgages is more challenging as the standard monthly payment can fluctuate.