Take-Out Loan

What is 'Take-Out Loan'

A take-out loan is a type of long-term financing (usually) on a piece of real property. Long-term take-out loans replace interim financing, such as a short-term construction loan. They are usually mortgages with fixed payments that are amortizing.

BREAKING DOWN 'Take-Out Loan'

Take-out loans can be used for a number of purposes. They are most commonly utilized in real estate lending to replace a short-term construction loan. Terms of the loan can include monthly payments or a one-time single balloon payment at maturity.

Take-Out Loan Process

A borrower must complete a full credit application to obtain approval for a take-out loan. A take-out loan is used to replace a previous loan often with a shorter duration and higher interest rate. All types of borrowers can obtain a take-out loan from a credit issuer to payoff past debts. Take-out loans can be used as a long-term personal loan to payoff previous outstanding balances with other creditors. Commonly it is used in real estate construction to help a borrower obtain more favorable financing terms.

Construction projects on all types of real estate property require a high initial investment yet they are not backed by a fully complete piece of property. Therefore, construction companies typically must obtain high interest short-term loans to complete initial phases of property development. Construction companies may choose to obtain a delayed draw term loan which can be based on various construction milestones being met before principal balances are dispersed. They also have the option of obtaining a short-term loan. Many short-term loans will provide the borrower with a principal payout that requires payment at a future time. Often the borrowing terms allow the borrower to make a one-time payoff at the loan’s maturity. This provides an optimal opportunity for a borrower to obtain a take-out loan with more favorable terms.

For example, assume XYZ company has received approval for plans to build a commercial real estate office building over 12 to 18 months. They may obtain a short-term loan for the financing they need to build the property with full repayment required in 18 months. The property plans are achieved ahead of schedule and the building is completed in 12 months. The company now has more negotiating power with the fully complete property able to be used as collateral. Thus, they decide to obtain a take-out loan which provides them the principal to payoff their previous loan six months early. Their new loan allows them to make monthly payments over 15 years at an interest rate which is half of their short-term loan. With the take-out loan they can repay their short-term loan six months early, saving on some interest costs. They now have 15 years to pay their new take-out loan at a much lower rate of interest with the completed property as collateral.