Equity stripping is a form of predatory lending where loan terms, fees, and practices systematically reduce the equity a borrower has in their property. It happens slowly, through multiple mechanisms, and borrowers often don't notice the full scope of the damage until they try to sell or refinance.
Fee Loading as Equity Stripping
Every dollar paid in unnecessary fees is a dollar of equity lost. Predatory lenders load loans with origination points, administrative fees, processing fees, and document preparation charges that far exceed what similar services cost elsewhere. On a refinance, these fees are typically rolled into the new loan balance rather than paid at closing, which means the borrower is immediately less equitable after the transaction than before.
Repeated refinancing compounds the damage. A borrower who refinances three times over ten years paying 3-4% in fees each time can easily lose $50,000-$80,000 in equity through transaction costs alone, before considering the reset amortization schedule that keeps them in the early, interest-heavy portion of the payment structure.
High-Interest Loans on Equity-Rich, Income-Poor Borrowers
Seniors who own their homes outright or nearly so are frequent targets. They have significant equity but may have limited income. Predatory lenders offer loans secured by the home equity at extremely high interest rates. The borrower gets cash; the lender gets first lien position on property that was previously unencumbered. Over time, the interest charges consume the equity the borrower spent decades building.
Forced Insurance and Add-On Products
Credit life insurance, disability insurance, and other products added to a loan without clear disclosure or genuine need reduce equity by increasing the loan balance without providing meaningful value. A $3,000 credit insurance policy financed at 9% over 20 years costs the borrower far more than $3,000 and delivers benefits that may duplicate coverage they already have or that they'd never actually collect.
Negative Amortization as Systematic Equity Destruction
Loans with negative amortization features are a direct mechanism for equity stripping. As the loan balance grows month after month on minimum payments, the borrower's equity declines even if property values remain stable. The lender is building their position as the borrower's position deteriorates.
Coventry Enterprises LLC identifies equity stripping patterns in loan documents. See: toxic lending and predatory lender tactics.