Understanding Take-Out Loans
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 include fixed, amortizing payments. These loans provide stability by substituting a short-term, higher-interest-rate loan with a long-term, lower-interest-rate one.
Take-out lenders who underwrite these loans are typically large financial companies like insurance or investment firms, while banks and savings and loan companies generally issue short-term loans, such as construction loans.
Key Takeaways
- A take-out loan provides a long-term mortgage or loan on a property that ’takes out’ an existing loan.
- It replaces interim financing, such as a construction loan, with a fixed-term mortgage.
- When used for rental or income-generating property, the take-out lender may receive a portion of the rental income.
Insights into Take-Out Loans
To secure a take-out loan, borrowers must complete a comprehensive credit application. This loan type replaces a previous loan, often one with a shorter duration and higher interest rate, making it an attractive option for all borrowers. While common in real estate construction to replace short-term construction loans, take-out loans can also serve as long-term personal loans that pay off existing debts.
The terms of a take-out loan can involve monthly payments or a balloon payment upon maturity, ensuring that borrowers transfer to more favorable financing terms.
How Businesses Utilize Take-Out Loans
Construction projects demand significant upfront investment and often lack the backing of a completed property, necessitating high-interest short-term loans for initial development phases. Construction companies may opt for a delayed draw term loan, released based on construction milestones, or a short-term loan.
Most short-term loans offer principal payouts with future payment requirements. Often, borrowers have a one-time payoff option at loan maturity, providing a prime opportunity for obtaining a take-out loan with better terms.
Real-Life Example of a Take-Out Loan
Consider XYZ company, which has received approval to construct a commercial real estate office building over 12 to 18 months. XYZ initially secures a short-term loan, due in 18 months. Once the building is completed in 12 months, XYZ’s finished property serves as collateral, enhancing its bargaining power.
XYZ opts for a take-out loan to pay off the short-term loan six months early. The new loan, with a payback period of 15 years and an interest rate half that of the initial loan, allows XYZ to capitalize on the lower interest rate. Consequently, XYZ saves on interest costs and benefits from 15 years of stable loan payments with the finished property as collateral.
Related Terms: mortgage, credit application, creditor, amortizing, construction loan.
References
- California Mortgage Advisors. “What Is a Construction Take-Out Loan?”
