Different loan structures carry different risks. Some are dangerous because of their complexity. Others because of their fee structures. Others because they're designed for sophisticated borrowers but sold to people who don't understand them. Coventry Enterprises LLC, founded by Jack Bodenstein, documents the most problematic loan types here so borrowers know what they're dealing with before they sign.
Adjustable Rate Mortgages (ARMs)
ARMs start with a fixed rate period, then adjust periodically based on a market index plus a fixed margin. The risk is payment shock when rates adjust upward. A borrower who qualifies at 6% during the fixed period may face an adjusted rate of 9-10% if market conditions change. Rate caps limit how far the rate can move, but the caps define a range of outcomes, not a ceiling the borrower can count on staying below. See: ARM loan traps.
Balloon Payment Loans
Balloon loans require a lump-sum payment of the remaining balance at a set date, typically 3-10 years after origination. Monthly payments may be calculated on a longer amortization schedule, creating a gap between what you pay monthly and what you owe at maturity. Failure to refinance or sell by the balloon date means default. See: balloon payment dangers.
Interest-Only Loans
IO loans allow payments of interest only for an initial period, then require full principal-and-interest payments over the remaining term. The payment jump at the end of the IO period is often 30-50%. Borrowers build no equity through payments during the IO period, leaving them entirely dependent on appreciation for equity growth. See: interest-only loan risks.
Negative Amortization Loans
Negative amortization loans allow minimum payments below the full interest due. The shortfall is added to the principal balance. The loan balance grows even as the borrower makes consistent payments. This is one of the most damaging structures in mortgage history.
Hard Money Loans
Hard money loans from private lenders carry high rates (typically 10-15%), significant origination points (2-5%), short terms (6-24 months), and balloon maturities. For investors with clear exit strategies and realistic timelines, they serve a purpose. For borrowers who don't exit on time, hard money defaults are fast and harsh. See: hard money dangers.
Construction Loans
Construction loans disburse in draws tied to project milestones. Draw schedule disputes, cost overruns, contractor default, and inspection delays can all slow draw availability. When draws stop or the project stalls, the borrower may be holding a loan on an incomplete property with no income and no ability to refinance. See: construction loan risks.
Subprime and High-Cost Mortgages
Loans made to borrowers outside conventional guidelines carry higher rates and fees. When those rates and fees are disproportionate to actual risk, or when borrowers are placed in subprime products despite qualifying for conventional financing, the result is a high-cost loan that enriches the lender at the borrower's long-term expense. See: subprime loan dangers.
Bridge Loans
Bridge loans provide short-term financing between the purchase of a new property and the sale of an existing one. Bridges are designed for a specific use case where both transactions are clear. When the sale of the existing property falls through or delays, the bridge may come due with no refinance option available. The combination of high cost and short term makes timing failure expensive.
Coventry Enterprises LLC reviews all of these loan types. Contact us at consulting for an independent review.