No, they don't dance around and take off their clothes. But scamming equity strippers could get the shirt off your back if you aren't careful.

Top Refinancing Tips: Beware of Strippers!

The news is full of stories about people being convicted of various types of mortgage fraud. In most cases, the fraudsters are borrowers, and the victims are mortgage lenders. But equity strippers target homeowners, often the elderly. Recognizing common schemes can help you protect yourself or your older friends and family members from these parasites.

How Does Equity Stripping Work?

Equity stripping scams take many different forms, but the single common element is that they target folks who have built up a lot of equity in their homes. Since this generally takes years to accomplish, older people are most often targeted.

Equity Stripping Scam #1: Foreclosure Rescue

Homeowners who get behind on their mortgage payments can find themselves besieged by dirtbags. When you miss a couple of payments, mortgage lenders may file a Notice of Default (NOD), which is a public record. Also public is the property address and the mortgage(s) against it. So con artists have little trouble calculating the amount of equity that could be stolen from you.

They knock on your door, give you a call, or stick a flyer in your mailbox and go to work ripping you off. The New York Times described the situation of one man in Newark, N.J., who owed around $100,000 on a home valued at $315,000, lost his job, and fell behind on his mortgage. Desperate to avoid foreclosure, he called the number on a flyer that so helpfully appeared on his doorstep. The lender offered a refinance mortgage that would give the owner $20,000 cash and also to sell the home "temporarily" to a third party for $315,000. The new owner would make the payments for a year and then sell the home back for $315,000. What really happened was that the new owner remortgaged the home and took about $120,000 in cash, skipped town, and let the home go into foreclosure.

Equity Stripping Scam #2: Loan Flipping

Borrowers can be robbed of their equity without relinquishing title to their homes or defaulting on their home loans. Some home equity strippers offer what seems like a great deal--cutting mortgage payments and giving you cash with no out-of-pocket costs! How can this be a bad thing? These guys use complicated deals and homeowners' ignorance of how mortgage amortization works to steal equity from borrowers.

Let's say the homeowner in the previous example runs into a different kind of scammer. He still owes $100,275 on a 7% loan he's been paying for 20 years, the home is worth $315,000, and he's behind on his $1,164-a-month mortgage. Some loan agent crawls out from under a rock and offers him the chance to drop his payment by over $300 and give him $10,000 cash with no out-of-pocket cost. That's not tough to do. The new loan is $120,275, which gives the homeowner his $10,000, but also kicks the lender $10,000. That's about 10 points in loan fees! And that's not all--the new loan has a start rate of 7.5% and adjusts. Once the mortgage rate rises, the unemployed borrower may have no way of making the payments, so he's quite likely to end up in foreclosure.

Avoiding the Strippers

The best way to avoid dealing with dirtbags is to nix unsolicited offers. To find legitimate refinancing opportunities, seek out licensed mortgage lenders, who are regulated, must provide standard disclosures, and are prohibited from offering you a mortgage refinance that does not leave you better off and that you are not capable of repaying. Shopping with reputable online mortgage sources like GuidetoLenders.com ensures that you're dealing with licensed and legitimate refinance mortgage lenders.