Do you own a house and are on the verge of foreclosure? Many people will do almost anything to maintain the roof over their heads. As a last-ditch effort, thousands of homeowners are turning to equity stripping to make their homes less attractive to creditors. However, don’t let desperate times call for desperate measures. While on paper this method seems fool-proof, it’s leaving people with even less than what they started with. Let’s take a look at what is “stripping the equity,” why it’s dangerous, and how to avoid it.
What is Equity Stripping?
Equity stripping is considered a form of asset protection. When someone is in debt (such as facing a foreclosure) and are having trouble making payments, creditors start to look at the assets that the debtor owns for collateral. For many, the most valuable asset we own is our home.
If you have a mortgage, you have been paying on your house. That means you have some equity in your asset. This is valuable to those who you are in debt to.
In order to shell out less money to creditors, you need to prove you have less assets than you actually do. The only way to do that is to hurt your assets. That’s why many are turning to equity stripping.
Types of Equity Stripping
There are a number of ways to go about lowering your equity on your house. Here are some of the most common:
Home Equity Line of Credit
The best way to keep creditors away from your equity is to tie your equity up elsewhere. To do this, many are putting their house up as collateral while they get a home equity line of credit (HELOC). This loan allows you to draw a maximum amount of the equity you already have in your house. The beauty? You don’t need to draw from the money…ever. There’s no penalty for not taking from the loan. Meanwhile, creditors looking at your assets will be turned off by seeing a HELOC.
While more effective, this is even riskier. Your equity is pretty much null and void because you will owe even more on the house than it’s worth. This might be a quick fix in fighting off a creditor, but it sets up a lifetime of debt.
This used to be a lot more common before divorce became a regular occurence. Here, people sign over their property to a family member or spouse who has less debt. While it seems like a no-brainer, you are handing over your property rights to another person. If the person you signed the house over to doesn’t hold up their end of the bargain, you may find yourself up the creek without a paddle.
What to Do Instead of Equity Stripping?
Equity stripping may be effective, but it’s also dangerous. You can end up with worse credit, no equity, or even homeless. While these are worst-case scenarios, they should be taken into consideration. Before turning to equity stripping as your answer, try these tips first:
- Create a Budget and See Where You Can Cut Costs
- Contact the Lender About a New Payment Plan
- AirBnB or Rent Out an In-Law
- Refinance Your Mortgage with a Lower Interest Rate
- Sell Your House and Downsize or Rent
While none of these seem like easy answers, they are far less risky than opening up more lines of credit or signing over your house. Equity stripping might seem like answer, but it also can end up becoming a foreclosure scam. Be sure you make an educated decision before doing something as important as equity stripping.