What is Future Value Financing?
Future value financing involves making projections about the future worth of an asset and adjusting the financing arrangement accordingly. Owing to the wide range of factors that can enter into calculating this type of financing, many lenders choose to not offer this type of financing option. However, a limited number of lenders offer a Future Value Finance Program for such high ticket items as real estate and higher end vehicles.
The most common application of future value financing has to do with improvements to existing property. When a homeowner wishes to take out a loan or a second mortgage in order to add on to the home or in some other way 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 determination the equivalent in value. The extension of the mortgage will be based on whether the lender determines that the amount of the loan will result in a rise in value for the property that is at least comparable to the amount of the loan, 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 great deal of room for error when future value financing is used as the basis for the loan. For example, there are many variables that may be used to determine future value that simply are not present when extending the loan on the basis of current values. Since the process can get very complicated with future value financing, lenders may choose to finance of the basis of the current estimated value of the property, and thus avoid investing time and resources into a difficult projection.
One characteristic 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 on the disbursement of the funds. This will mean that the lender will take steps to monitor the progress of the work, and ensure that everything is done properly. For homeowners who do not have the time or the inclination to supervise the work, the presence of the lender can help to ensure that the work is completed in a professional and a timely manner. However, if the homeowner does prefer to be closely involved with the work, the presence of the lender may be viewed as a nuisance.
@hamje32 - I don't think homeowners would be too fond of this kind of financing either.
As a homeowner, the last thing that I would want is a lender micro managing me with any type of home remodeling project. I would avoid this kind of financing for that reason alone.
I don’t want strings attached to the home loan, apart from the basic contractual agreements. In the end, it’s my own home after all. I’d rather go without the remodeling project than have the lender overseeing it with me.
@nony - I agree. Another issue that you have to take into account is other factors which could affect valuations, like a housing bubble for instance.
It doesn’t matter what you to do your home if there is an implosion in home prices. Your house could lose a substantial part of its value, rendering your home improvements completely nil in terms of valuations.
Bankers know this and would probably want to avoid this kind of asset financing. I don’t see why they would want to do it anyway; if you need a second mortgage, the lender should just look at your credit and cash flow, see if you’re a worthy risk for a second mortgage, and then just lend you the money regardless of what it’s ultimately used for.
I don’t think that future value financing is a good idea from the lender’s vantage point. The reason is that it’s almost impossible to know what home improvements will actually do to the value of the property.
I made some improvements to my house, thinking that they would cause a substantial rise in property valuations (and I was assured by my realtor that they would) and the net effect was negligible when I finally sold the house.
Valuation can be in the eye of the beholder and so in the end, I think this type of financing is risky for the lender. If even my real estate agent can be wrong, you can imagine that the banks could be even more wrong with any type of future value calculation.
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