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 madeThe lender and the borrower’s names and contact detailsThe amount of the advance
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.
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 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.
