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Future value financing involves projecting the value of an asset and adjusting the financing accordingly, but few lenders offer it due to its complexity. It is commonly used for improving property, and lenders may monitor the progress of the work.
Future value financing involves making projections about the future value of an asset and adjusting the financing agreement accordingly. Due to the wide range of factors that can go into calculating this type of financing, many lenders choose not to offer this type of financing option. However, a small number of lenders offer a future value financing program for high-end items like real estate and high-end vehicles.
The most common application of future value financing has to do with improving existing property. When a homeowner wishes to take out a mortgage or second mortgage to expand the home or otherwise enhance the property, the lender will evaluate the impact of these changes on the value of the land and buildings involved. This component is sometimes referred to as determining the equivalent by value. The mortgage extension will be based on the lender determining that the loan amount will result in an increase in value for the property that is at least comparable to the loan amount, including interest and fees. The actual process for making this determination of equivalent values may vary from one lender to another.
Many lenders see a large margin for error when future value financing is used as the basis for the loan. For example, there are many variables that can be used to determine future value that are simply not present when extending the loan based on current values. Because the process can get very complicated with future value financing, lenders may choose to finance on the basis of the property’s current appraised value, thus avoiding investing time and resources in a difficult projection.
One feature of future value financing that may or may not be attractive to the homeowner is the fact that lenders extending this type of financing may also want to have some degree of control over the disbursement of funds. This will mean that the lender will take steps to monitor the progress of the work and ensure everything is done correctly. For homeowners who don’t have the time or inclination to supervise construction, the presence of the lender can help ensure that the work is completed in a professional and timely manner. However, if the homeowner prefers to be closely involved with the work, the presence of the lender can be seen as a nuisance.
Smart Asset.
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