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What is a Future Advance?

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum

A future advance is a type of loan that functions as a line of credit that is secured by some type of collateral. This lending option is often used to structure mortgages, as well as some forms of business loans. One unique characteristic of a future advance is that the approved funds do not have to be disbursed at the time the loan is closed, effectively allowing the borrower to draw on the line of credit at a later date if necessary.

Home equity conversion mortgages are one example of a future advance strategy. Generally employed by individuals who wish to become homeowners, the advance structure establishes a maximum limit that can be drawn upon for the purpose of purchasing the property. Once the advance is approved, the individual can choose to withdraw whatever amount is needed to complete the purchase of the real estate, and leave the remaining line of credit available for use in making improvements to the home. As long as the outstanding balance is repaid within the terms agreed upon in the loan contract, the line of credit remains open and available for the debtor to use when and as needed.

A future advance might be used to finance a new home construction.
A future advance might be used to finance a new home construction.

A future advance can also be used as a means of financing the construction of a new home. With this model, the lender and borrower work together to determine all costs associated with the project, including materials and labor. Once the total cost is determined, the two parties draft a time line that will allow the borrower to receive an equitable line of credit that makes it possible to cover expenses as they are incurred, while simultaneously paying for those expenses that have already taken place. The end result of this model is that the new homeowner owes a relatively small amount at the time the construction is completed.

Businesses can also make use of the future advance model. With this model, the collateral may be one or more assets that the company owns outright, or even the business itself. As with the home equity loan model, the business is granted a line of credit that can be drawn upon when and as needed. This approach allows the business to effectively secure resources to launch a new project, such as building a new facility or marketing a new product. Assuming that the project is successful and begins to generate revenue in a reasonable amount of time, the outstanding balance can be repaid quickly, a move that allows the line of credit established by the future advance to remain in place for future projects.

While there are many benefits to using a future advance as a construction loan note, a mortgage on a new home, or even a general business loan, there is one drawback to keep in mind. The amount of the monthly repayment is not fixed. When and as the borrower draws more of the available credit line, the amount of the repayment will also increase. For this reason, it is important for the borrower to take steps to ensure that he or she can reasonably manage to make that minimum payment, even if the entire line of credit is used.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...

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    • A future advance might be used to finance a new home construction.
      By: leekris
      A future advance might be used to finance a new home construction.