There are home equity lenders out there who push serial refinancing to the point where home equity is wiped out. There are three practices by these lenders that alone, or in combination with each other, can be particularly harmful.
Equity Stripping – The lender makes a loan to the borrower based on the amount of equity the borrower has in the home, not on the borrower’s ability to repay. When a lender makes a loan to a borrower and the lender knows the borrower does not have the ability to repay, the loan is designed to go into default so that the lender can foreclose on the borrower’s home.
Packing – This is the practice of selling credit insurance and other products and services to the borrower together with the loan. The cost of these extras may be wrapped into the loan package and not adequately disclosed.
Flipping – After the borrower has taken the initial home equity loan, the lender attempts to get the borrower to refinance at regular intervals, providing the lender with the opportunity to charge more points and fees.