Future value financing involves projecting the future value of an asset and adjusting the financing agreement accordingly. This type of financing is not offered by many lenders, but some offer it for high-priced items like real estate and high-end vehicles. The most common application is for improvements to existing property, and lenders may want some degree of control over the disbursement of funds.
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 limited number of lenders offer a Future Value Financing Program for high-priced items like real estate and high-end vehicles.
The most common application of future value financing has to do with improvements to existing property. When a homeowner wishes to obtain a loan or a second mortgage to add to the home or otherwise improve the property, the lender will assess the impact of these changes on the value of the land and buildings involved. This component is sometimes called the determination of equivalent value. The mortgage extension will be based on whether the lender determines that the loan amount will result in an increase in property value 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 lot of room for error when using future value financing 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 on the basis of present values. Since the process can be very complicated with future value financing, lenders may choose to finance on the basis of the current estimated value of the property, thus avoiding investing time and resources in a difficult projection.
One feature of future value financing that may or may not be attractive to a homeowner is the fact that lenders who extend this type of financing may also want some degree of control over the disbursement of the funds. This will mean that the lender will take steps to monitor the progress of the job and ensure that everything is done correctly. For homeowners who do not have the time or inclination to oversee the work, the lender’s presence can help ensure that the work is completed in a professional and timely manner. However, if the owner prefers to be closely involved with the work, the lender’s presence can be seen as a nuisance.
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