An ordinary mortgage buys property. A future-advance mortgage buys property with part of the loan and gives you more money later. Construction mortgages are a good example: You buy the land with the initial payment and then borrow more money periodically to pay the builder as he gradually completes the house.
How It Works
When you take out a mortgage, you put up your house as collateral for the loan. A future-advance mortgage says in one of its clauses that the house is also collateral for loans that haven't been made yet. The clause will say something along the lines of "this deed secures future advances" or refer to debts "hereafter existing." In addition to construction loans, a future-advance mortgage can enable you to take out a mortgage and a home-equity line of credit at the same time.
Pros and Cons
If you're building a house, taking out a single construction mortgage is simpler than taking out one loan to buy the land, then another loan to build the house. If you use the future-advance mortgage to set up a home equity line of credit, this is cheaper than borrowing on credit cards, but also riskier: If you default, the lender can foreclose on your house. In some states, the mortgage lender can treat certain expenses – attorney fees if it takes you to court, for instance – as an advance payment to you, even if you didn't request it.
Complications of Future-Advance Mortgages
Future-advance mortgages pose a challenge for mortgage law. If a lender forecloses on a house, the first or senior lien on the property usually gets paid off first, with a few exceptions. With a future-advance mortgage, you could take out the initial home-purchase loan, take out a home equity loan from a second lender, and then make added draws on the original loan. The legal challenge is deciding whether the later draws are part of the senior mortgage or junior to the second loan.
Rights of Lenders
The rights of the future-advance mortgage lender generally hinge on whether the advances after the initial payment are optional or obligated. If you have a construction mortgage that commits the lender to make the payments, every payment counts as part of the senior mortgage. If the lender has some discretion whether to issue you extra money, then it's an optional loan. If it's optional, the lender's lien is junior to any loans you took out before you drew on the line of credit.
