What does the term "equity stripping" refer to?

The term "equity stripping" primarily refers to a practice where a lender refinances borrowers into high-fee loans. This often results in the borrower losing equity in their property, as the costs associated with the refinancing—such as high fees and possibly unfavorable loan terms—can significantly reduce the available equity that they had built up over time. In many cases, borrowers may be led into these high-fee loans without a full understanding of the long-term financial repercussions.

Refinancing into high-fee loans can be particularly problematic because it may be presented as a beneficial move to consolidate debt or lower payments, but it can ultimately erode the borrower’s investment in the property. This practice is especially concerning when vulnerable borrowers, who may be facing financial difficulties, are targeted by unscrupulous lenders. Understanding equity stripping is essential for mortgage professionals, as it highlights the importance of ethical lending practices and the need for borrowers to be informed about the implications of refinancing options.

The other choices do not accurately encapsulate the concept of equity stripping. Reducing equity due to depreciation, increasing a borrower's credit score, or ensuring loan payments are made on time do not reflect the specific unethical lending practice that equity stripping denotes.