Take-Out Loan

Written By
Paul Tracy
Updated July 22, 2021

What is a Take-Out Loan?

A take-out loan is a loan that replaces another loan.

How Does a Take-Out Loan Work?

Let's say Company XYZ is a real estate development company. It owns a piece of land at a busy intersection and decides to build a huge apartment complex on the site.

Company XYZ first gets a $5 million construction loan from Bank A, which Company XYZ uses to pay the general contractor and all the associated expenses of constructing an apartment building. The loan must be repaid in 18 months, at the estimated completion of the construction. Because the collateral -- the construction site -- isn't worth much until it becomes a fully rented and operating apartment building, Bank A charges 9% on the loan.

After the apartment building is finished, Company XYZ gets a $5 million mortgage from a take-out lender, Bank B. This loan has a 30-year term, is collateralized by a fully functioning apartment building, and has a 5% interest rate. Company XYZ uses Bank B's loan to pay off -- or take out -- Bank A's loan.

Why Does a Take-Out Loan Matter?

Take-out loans are long-term loans, usually on real property. The real difference between them and any other loan, however, is that take-out lenders usually want interest payments as well as a portion of any capital gains on the collateral when it is eventually sold. In our example, if Company XYZ sells the apartment building, it might have to give Bank B a percentage of the difference between the construction cost and the sale price. In some cases, the take-out lender might want a cut of the income produced by the real estate (in our example, the rents).

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Take-Out Loan.
Be the first to ask a question

If you have a question about Take-Out Loan, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Take-Out Loan, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Take-Out Loan

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms