# Take-Out Loan: Definition, Uses in Real Estate, Example

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## What Is a Take-Out Loan?

A take-out loan is a type of long-term financing that replaces short-term interim financing. Such loans are usually mortgages that are collateralized with assets and have fixed payments that are [amortizing](https://www.investopedia.com/terms/a/amortization.asp).

[Take-out](https://www.investopedia.com/terms/t/takeout.asp) lenders who underwrite these loans are normally large financial conglomerates, such as insurance or investment companies, while mortgage lenders, such as banks or savings and loan companies, usually issue short-term loans, such as [construction loans](https://www.investopedia.com/terms/c/construction-loan.asp).

### Key Takeaways

*   A take-out loan provides a long-term mortgage or loan on a property that "takes out" an existing loan.
*   The take-out loan will replace interim financing, such as replacing a construction loan with a fixed-term mortgage.
*   If the take-out loan is used to finance a rental or income-generating property, the take-out lender may be entitled to a portion of the rent earned.

## Understanding Take-Out Loans

A borrower must complete a full [credit application](https://www.investopedia.com/terms/c/credit-application.asp) to obtain approval for a take-out loan, which replaces a previous loan, often one with a shorter duration and higher interest rate. All types of borrowers can get a take-out loan from a credit issuer to pay off past debts. Take-out loans can be used as long-term personal loans to pay off previous outstanding balances with other [creditors](https://www.investopedia.com/terms/c/creditor.asp). They are most commonly used in real estate construction to help borrowers replace short-term construction loans and obtain more favorable financing terms. The take-out loan's terms can include monthly payments or a one-time balloon payment at maturity.

> **Important**
>
> Take-out loans are an important way of stabilizing your financing by replacing a short-term, higher-interest-rate loan with a long-term, lower-interest-rate one.

## How Do Businesses Use Take-Out Loans?

Construction projects on all types of real estate property require a high initial investment, yet they are not backed by a fully completed piece of property. Therefore, construction companies typically must obtain high-interest short-term loans to complete the initial phases of property development. Construction companies may choose to get a [delayed draw term loan](https://www.investopedia.com/terms/d/delayeddrawtermloan.asp), 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.

## Example of a Take-Out Loan

Assume that XYZ company has approved plans to build a commercial real estate office building in the next 12 to 18 months. It may obtain a short-term loan for the financing it needs 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. XYZ now has more negotiating power because the fully complete property can be used as collateral. Thus, it decides to obtain a take-out loan, which provides it with the principal to pay off the previous loan six months early.

The new loan allows XYZ to make monthly payments over 15 years at an interest rate that is half of that of the short-term loan. With the take-out loan, it can repay its short-term loan six months early, saving on interest costs. XYZ now has 15 years to pay its new take-out loan at a much lower rate of interest, using the completed property as collateral.

## Is a Take-Out Loan the Same as a Cash-Out Loan?

No, cash-out loans essentially refinance the existing loan in order to provide the borrower with funds. A take-out-loan is an entirely new loan. It replaces a short-term, higher-interest-rate loan with a long-term, lower-interest-rate one.

## Is It Difficult to Find Take-Out Loans?

No, it's pretty easy for borrowers with completed construction projects to find lenders willing to offer take-out loans. After all, the loan secured, so the building acts as collateral.

## Why Is Take-Out Financing Beneficial?

You can generally get more favorable loan terms with a take-out loan since you've invested in the property. You could qualify for better interest rates over a longer term.

## The Bottom Line

If you're involved in construction, you should be familiar with take-out loans. By replacing a short-term loan that has high interest rates with a take-out loan, you can pay off the loan faster and pay less in interest.