Take-out loan

A long-term loan taken out upon completion of a new building.

Take-out loans work together with construction loans. Here is how it works: A land developer gets a construction loan to build a cluster of homes. Then when all the homes are ready to sell, a lender offers a buyer a take-out loan to purchase one of the new homes. The builder, now taking on the role as seller, will then use part or all of the money from the sale towards paying off the construction loan. If you plan to build your own home, you can also pay off the construction loan using a take-out loan. Take-out loans are also called permanent loans.

Example: How does a builder pay off a construction loan?

The builder gets a $1 million construction loan to put up ten homes. The builder then puts up each home for sale at $300,000. The buyer gets a take-out loan for $300,000 to buy one of these brand new homes. For every home that the builder sells, the builder pays $100,000 towards the construction loan and pockets $200,000 as profit.