What is a Judgment?

June 4, 2020 &• 6 min read by Gerri Detweiler Comments 737 Comments

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A judgment is an order issued by a court of law. When you borrow money, you are legally required to repay the debt. This includes opening a credit card account, getting a line of credit from your bank and obtaining financing for a big purchase.

You can also become indebted to service providers. This can include utility companies, medical professionals, cell phone service providers and auto mechanic shops. They provide a service to you and then bill you, similar to a credit extension.

So, what happens when you don’t pay a bill or repay a debt? The company, creditor or collection agency has legal ways to pursue payment. One of those options is to sue you. If they are successful, the court issues a judgment against you.

What Happens After a Judgment Is Entered Against You?

The court enters a judgment against you if your creditor wins their claim or you fail to show up to court. You should receive a notice of the judgment entry in the mail. The judgment creditor can then use that court judgment to try to collect money from you. Common methods include wage garnishment, property attachments and property liens.

State laws determine how much money and what types of property a judgment creditor can collect from you. These laws vary. So, you need to look to your own state for the rules that apply. A consumer law attorney can help you understand your state’s laws on judgment collections.

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What Is a Judgment on Property?

Your property includes both physical items and money. That means judgment creditors can seek debt payment from more than your wages and bank accounts. They may also take back a car you financed or other personal property. Another option is placing a lien on some of your property, such as your home.

What Property Can Be Taken to Settle a Judgment?

Creditors must follow the law when applying a judgment to take, or seize, your property. Some things are exempt—which means they can’t touch those items or properties. Some examples include the home you live in, the furnishings inside it and your clothes. State laws identify these items and set limits based on their value.

Non-exempt property can be taken to help meet a judgment debt. Your creditor can take or leverage these possessions in the following ways:

  • Wage attachments. This is known as wage garnishment. When your employer receives the proper legal notice, they must withhold a percentage of your wages. These payments are sent to the judgment creditor until your debt is paid.
  • The Consumer Credit Protection Act caps these types of garnishments. The limit is 25% of your disposable weekly wages or the amount you earn that’s above 30 times the minimum wage. The lessor of these two amounts applies. Some states set the cap even lower.
  • Nonwage garnishment. If you’re retired, unemployed or self-employed, your bank account may be garnished instead. Here, too, there are exemptions. Veterans payments, social security and disability benefits are not eligible for nonwage garnishment. Some states add even more restrictions to the garnishment of bank funds.
  • Property liens. If you own real estate, your judgment creditor may file a legal claim against it. These liens notify lenders of the creditor’s rights to your property. That way, if you sell your real property, the debt must be paid out of the proceeds. In many states, liens are placed automatically when a judgment is entered.
  • Property levies. Judgments may also allow some of your non-exempt personal property to be taken through a levy. Law enforcement may seize things like valuable collections or jewelry to be sold at auction. Sales proceeds are applied to your debt.

What Can You Do to Avoid a Judgment?

Heading off a lawsuit is the best way to avoid a judgment. To do so, don’t ignore calls and correspondence from your creditor. Reach out to learn if they’ll accept suitable payment arrangements. Educate yourself on smart ways to pay debt collectors, and consider using the services of a debt management agency.

What if the loan company or debt collector has already started the lawsuit? Don’t skip court. Show up and fight. You may win if the statute of limitations has expired.

If you haven’t made a payment on an old debt for many years, you may have a successful legal defense. Most states set the time frame between four to six years. Collectors often still file suit because they win by default if you don’t show up. So, it’s important that you go to court with proof of your last date of payment.

If you successfully defeat or avoid a judgment, don’t stop there. Take some sensible steps to help you get out of and stay out of debt. Adopting these smart financial habits can also help prevent future judgment actions.

How Long Can the Judgment Creditor Pursue Payment?

The answer depends on where you live, since state laws differ. Some states limit collection efforts to five to seven years. Others allow creditors to pursue repayment for more than 20 years. With the right to renew a judgment over and over in many states, it may last indefinitely.

Judgment renewals may be repeated as often as desired or limited to two or three times. This is another state-specific issue. Judgments can also lapse or become dormant. The creditor must then act within a specific time frame to revive it.

What Happens When You Can’t Pay a Judgment Filed Against You?

If you own a limited amount of property, it may all be exempt from judgment collection efforts. Also, you may not work or only work part-time. With the CCPA cap, that may mean you don’t earn enough for garnishment.

This inability to pay your debt is called being judgment proof, collection proof or execution proof. While these circumstances exist, the judgment creditor has no legal way to collect on the debt. It’s not a permanent solution. The creditor may revisit collection efforts periodically for many years.

For a more permanent solution, you may want to consider filing bankruptcy. This process can discharge or eliminate most civil judgments for unpaid debt. Exceptions apply for things like child support, spousal support, student loans and some property liens. Speak with a bankruptcy lawyer to learn whether this will help your situation.

Can You Settle a Judgment?

If you can afford to pay a decent lump sum, you may be able to negotiate a settlement. The judgment creditor may be willing to settle if they fear you will otherwise file bankruptcy. Get the terms and settlement amount you agree upon in writing. Be sure the creditor agrees to file a satisfaction of judgment with the court after they receive your pay off.

Can a Judgment Be Challenged or Reversed?

Challenging and overturning a judgment is difficult, but not always impossible. This is the case if there were errors. Perhaps you weren’t notified of the suit or it was never your debt to begin with. Consult with an attorney to find out whether you have grounds to challenge the decision.

If you want to challenge a judgment, act fast. If you received prior notice of the case, you may have up to six months to reopen it. If you weren’t notified, you likely have up to two years to appeal. By reopening the case, you have the opportunity to fight the claim anew.

Do Credit Reports Still Include Judgments?

For many years, credit reports included judgment information. But that changed in 2017. The National Consumer Assistance Plan is responsible for creating more accurate credit data requirements. These changes resulted in the removal of civil debt judgments from credit reports.

Judgments are still a matter of public record. But the NCAP now requires that there be identifying information on these records for more accuracy. That data includes a social security number or date of birth along with the consumer’s name and address.

Public records cannot include this type of identifying information. It would violate privacy laws. This is the reason these judgments are no longer reported on credit files.

How Do You Find Out if You Have Any Judgments Against You?

You should receive a summons when you’re being sued. So, you can expect a default judgment will follow if you don’t show up in court. You can also expect a notification when a judgment is entered against you.

Mistakes happen, though. You may have missed the notice or moved to a new address. If that happens, you may not learn of the judgment until collection actions start.

What if You Find a Judgment on Your Credit Report?

Take action if you learn that judgments are still being reported by Equifax, Experian or Trans Union. The NCAP eliminated this practice. So if there’s a judgment on your report, this is definitely something that you should dispute. Credit repair services, like Lexington Law, can help you dispute the error and correct your report.

If you’d like a more in-depth look at your credit score, give ExtraCredit, our newest product, a try. It has five killer features that all work together as a solution to your credit troubles. Plus, you’ll be able to see all 28 of your FICO credit scores. 

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Disclosure: Credit.com and CreditRepair.com are both owned by the same company, Progrexion Holdings Inc. John C Heath, Attorney at Law, PC, d/b/a Lexington Law Firm is an independent law firm that uses Progrexion as a provider of business and administrative services.

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Source: credit.com

Different Types of Debt

  • Get Out of Debt

Debt comes in all shapes and sizes. You can owe money to utility companies, banks, credit card providers, and the government. There’s student loan debt, credit card debt, mortgage debt, and much more. But what are the official categories of debt and how do the payoff strategies for these debts differ?

Categories of Debt

Debt is generally categorized into two simple forms: Secured and Unsecured. The former is secured against an asset, such as a car or loan, and means the lender can seize the asset if you fail to meet your obligations. Unsecured is not secured against anything, reducing the creditor’s control and limiting their options if the repayment terms are not met.

A secured debt provides the lender with some assurances and collateral, which means they are often prepared to provide better interest rates and terms. This is one of the reasons you’re charged astronomical rates for credit cards and short-term loans but are generally offered very favorable rates for home loans and car loans.

If the debtor fails to make payments on an unsecured debt, such as a credit card, then the debtor may file a judgment with the courts or sell it to a collection agency. In the first instance, it’s a lot of hassle without any guarantee. In the second, they’re selling the debts for cents on the dollar and losing a lot of money. In either case, it’s not ideal, and to offset this they charge much higher interest rates and these rates climb for debtors with a poorer track record.

There is also something known as revolving debt, which can be both unsecured and secured. Revolving debt is anything that offers a continuous cycle of credit and repayment, such as a credit card or a home equity line of credit. 

Mortgages and federal student loans may also be grouped into separate debts. In the case of mortgages, these are substantial secured loans that use the purchase as collateral. As for federal student loans, they are provided by the government to fund education. They are unsecured and there are many forgiveness programs and options to clear them before the repayment date.

What is a Collection Account?

As discussed above, if payments are missed for several months then the account may be sold to a debt collection agency. This agency will then assume control of the debt, contacting the debtor to try and settle for as much as they can. At this point, the debt can often be settled for a fraction of the amount, as the collection agency likely bought it very cheaply and will make a profit even if it is sold for 30% of its original balance.

Debt collectors are persistent as that’s their job. They will do everything in their power to collect, whether that means contacting you at work or contacting your family. There are cases when they are not allowed to do this, but in the first instance, they can, especially if they’re using these methods to track you down and they don’t discuss your debts with anyone else.

No one wants the debt collectors after them, but generally, you have more power than they do and unless they sue you, there’s very little they can do. If this happens to you, we recommend discussing the debts with them and trying to come to an arrangement. Assuming, that is, the debt has not passed the statute of limitations. If it has, then negotiating with them could invalidate that and make you legally responsible for the debt all over again.

Take a look at our guide to the statute of limitations in your state to learn more.

As scary as it can be to have an account in collections, it’s also common. A few years ago, a study found that there are over 70 million accounts in collections, with an average balance of just over $5,000.

Can Bankruptcy Discharge all Debts?

Bankruptcy can help you if you have more debts than you can repay. But it’s not as all-encompassing as many debtors believe.

Chapter 7 bankruptcy will discharge most of your debts, but it won’t touch child support, alimony or tax debt. It also won’t help you with secured debts as the lender will simply repossess or foreclose, taking back their money by cashing in the collateral. Chapter 13 bankruptcy works a little differently and is geared towards repayment as opposed to discharge. You get to keep more of your assets and in exchange you agree to a payment plan that repays your creditors over 3 to 5 years.

However, as with Chapter 7, you can’t clear tax debts and you will still need to pay child support and alimony. Most debts, including private student loans, credit card debt, and unsecured loan debt will be discharged with bankruptcy.

Bankruptcy can seriously reduce your credit score in the short term and can remain on your credit report for up to 10 years, so it’s not something to be taken lightly. Your case will also be dismissed if you can’t show that you have exhausted all other options.

Differences in Reducing Each Type of Debt

The United States has some of the highest consumer debt in the world. It has become a common part of modern life, but at the same time, we have better options for credit and debt relief, which helps to balance things out a little. Some of the debt relief options at your disposal have been discussed below in relation to each particular type of long-term debt.

The Best Methods for Reducing Loans

If you’re struggling with high-interest loans, debt consolidation can help. A debt consolidation company will provide you with a loan large enough to cover all your debts and in return, they will give you a single long-term debt. This will often have a smaller interest rate and a lower monthly payment, but the term will be much longer, which means you’ll pay much more interest overall.

Debt management works in a similar way, only you work directly with a credit union or credit counseling agency and they do all the work for you, before accepting your money and then distributing it to your creditors.

Both forms of debt relief can also help with other unsecured debts. They bring down your debt-to-income ratio, leave you with more disposable income, and allow you to restructure your finances and get your life back on track.

The Best Methods for Reducing Credit Cards

Debt settlement is the ultimate debt relief option and can help you clear all unsecured debt, with many companies specializing in credit card debt. 

Debt settlement works best when you have lots of derogatory marks and collections, as this is when creditors are more likely to settle. They can negotiate with your creditors for you and clear your debts by an average of 40% to 60%. You just need to pay the full settlement amount and the debt will clear, with the debt settlement company not taking their cut until the entire process has been finalized.

A balance transfer can also help with credit card debt. A balance transfer credit card gives you a 0% APR on all transfers for between 6 and 18 months. Simply move all of your credit card balances into a new balance transfer card and then every cent of your monthly payment will go towards the principal.

The Best Methods for Reducing Secured Debts

Secured debt is a different beast, as your lender can seize the asset if they want to. This makes them much less susceptible to settlement offers and refinancing. However, they will still be keen to avoid the costly foreclosure/repossession process, so contact them as soon as you’re struggling and see if they can offer you anything by way of a grace period or reduced payment.

Most lenders have some form of hardship program and are willing to be flexible if it increases their chances of being repaid in full.

Source: pocketyourdollars.com

How to Build Credit with Fingerhut

  • Raise Credit Score

If you’ve been wanting to make a big purchase, but your credit is less than spectacular, you might have looked into Fingerhut as an option. 

Fingerhut is an online catalog and retailer that showcases a multitude of products. On this website, customers can shop for anything from electronics to home décor to auto parts. Fingerhut offers financing through their own line of credit, making it appealing to shoppers with poor credit or a nonexistent credit history. Many consumers have a better chance of getting approved by Fingerhut, than they might have of getting approved through most other credit card companies. It’s an option worth looking into if you want to improve your credit score through credit utilization.  

The major difference between Fingerhut and credit cards that cater to low credit scores is that Fingerhut credit is exclusively available for use with its own company’s products and authorized partners. You’ll also find that the company’s products are pricier than they would be through most other retailers, while also bearing the weight of higher interest rates. While it might seem like a good idea if you don’t have good credit, it’s best to familiarize yourself with the ins and outs of the company beforehand so that you know what you’re signing up for. 

How Fingerhut credit works

When you apply for a Fingerhut credit account, you can get approved by one of two accounts:

  • WebBank/Fingerhut Advantage Credit Account.
  • Fingerhut FreshStart Installment Loan issued by WebBank.

As it happens, by submitting your application, you are applying for both credit accounts. Applicants will be considered for the Fingerhut FreshStart Installment Loan issued by WebBank as a direct result of being denied for the WebBank/Fingerhut Advantage Credit Account. In other words, you won’t have a way of knowing which one you will be approved for prior to applying. Both credit accounts are issued by WebBank and are set up so that customers can purchase merchandise by paying for them on an installment plan with a 29.99% Annual Percentage Rate (APR). These are the only things that the different Fingerhut credit accounts have in common.

The WebBank/Fingerhut Advantage Credit Account

The WebBank/Fingerhut Advantage Credit Account works very much like an unsecured credit card, except that it’s an account that you can only use it to shop on Fingerhut or through its authorized partners. 

This credit account features:

  •  No annual fee.
  • A 29.99% interest rate.
  • A $38 fee on late or returned payments.
  • A possible down payment; it may or may not be required. You won’t know prior to applying. 

If you get denied for this line of credit, your application will automatically be reviewed for the Fingerhut FreshStart Credit Account issued by WebBank, which is both structured and conditioned differently.

Fingerhut FreshStart Installment Loan issued by WebBank

If you get approved for the Fingerhut FreshStart Installment Loan, you must follow these three steps to activate it:

  • Make a one-time purchase of no less than $50.
  • Put a minimum payment of $30 down on your purchase, and your order will be shipped to you upon receipt of your payment. You may not use a credit card to make down payments, but you can use a debit card, check, or a money order. 
  • Make monthly payments on your balance within a span of six to eight months.

You can become eligible to upgrade to the Fingerhut Advantage Credit Account so long as you are able to pay off your balance during that time frame or sooner without having made any late payments. Keep in mind that paying for the entire balance in full at the time you make your down payment will result in you not qualifying for the loan as well as being ineligible for upgrade. 

How a Fingerhut credit account helps raise your credit score

The fact that it can help you improve your credit is one of the biggest advantages of using a Fingerhut credit account. 

When you make your payments to Fingerhut in full and on-time, the company will report that activity to the three major credit bureaus. This means that your good credit utilization won’t go unnoticed nor unrewarded. If you use Fingerhut to improve your credit score, you will eventually be able to apply for a credit card through a traditional credit card company—one where you can make purchases anywhere, not just at Fingerhut. 

Additional benefits of a Fingerhut credit account

Besides using it as a tool to repair your bad credit, there are a few other benefits to using a WebBank Fingerhut Advantage Credit Account such as:

  • No annual fee.
  • Fingerhut has partnerships with a handful of other retailers, which means you can use your Fingerhut credit line to make purchases through a variety of companies. Fingerhut is partnered with companies that specialize in everything from floral arrangements to insurance plans.
  • There are no penalties on the WebBank Fingerhut Advantage Credit Account when you pay off your balance early.

How to build credit with Fingerhut

Fingerhut credit works the same way as the loans from credit card companies work: in the form of a revolving loan. 

A revolving loan is when you are designated a maximum credit limit by your lender, in which you are allowed to spend. Whatever you spend, you are expected to pay back in full and on-time through a series of monthly payments. This act of borrowing money and paying off bills using your Fingerhut account causes your balances to revolve and fluctuate, hence, its name. 

Your credit activity, good or bad, gets reported to the three major credit bureaus and in turn, will have an effect on your credit report. Revolving loans play a large role in your credit score, affecting approximately 30% of your score through your credit utilization ratio. If your credit utilization ratio, the amount of available revolving credit divided by your amount owed, is too high then your credit score will plummet. 

When using a Fingerhut account, the goal is to try to keep your amounts owed as low as you possibly can so that you can maintain a low utilization ratio, and as a result, have a higher credit score.

Alternatives to Fingerhut

If you’ve done all your research and decided that Fingerhut isn’t the right choice for you, there are other options that might serve you better, even if you have bad credit. There are a variety of secured credit cards that you can apply for such as:

  • The OpenSky Secured Visa Credit Card: You will need a $200 security deposit to qualify for this secured credit card, but you can most likely get approved without a credit check or even a bank account. It can also be used to improve your credit, as this card does report to the three major credit bureaus. While this card does come with an annual $35 fee, you can use it to shop anywhere that will accept a Visa. 
  • Discover it Secured:  For all those opposed to paying an annual fee of any sort, this card might just be the one for you. With a $0 annual fee and the ability to earn rewards through purchases, there’s not much to frown about with this secured credit card. One of the best perks, is that it allows you the chance to upgrade to an unsecured card after only eight months. 
  • Deserve Pro Mastercard: This card is a desirable option for those with a short credit history. There is no annual fee and no security deposit required and, if your credit history isn’t very long-winded, that’s okay. The issuers for this card may use their own process to decide whether or not you qualify for credit, by evaluating other factors such as income and employment. This card is especially nifty because you can get cash-back rewards such as 3% back on every dollar that you spend on travel and entertainment, 2% back on every dollar spent at restaurants, and 1% cash back on every dollar spent on anything else. 

Final Thoughts 

Fingerhut is an option worth looking into for those with bad credit or a short credit history. If you want to use a Fingerhunt credit account to improve your credit score, be sure to use it wisely and make all of your payments on time, just as you would with any other credit card.

Even though it might be easy to get approved, the prices and interest rates on items sold through Fingerhut are set higher than they would be at most other retailers, so it’s important to consider this before applying. 

There are a ton of options available, regardless of what your credit report looks like, if you are trying to improve your credit. If the prices of Fingerhut’s merchandise are enough to scare you away, you might want to consider applying for a secured credit card. 

Source: pocketyourdollars.com

Freezing Your Credit

  • Raise Credit Score

In the age of paperless transactions, identify theft is something that virtually all of us are susceptible to. If your identity is stolen, the consequences can be severe, and in some cases, can take years to recover from. One way to be proactive against fraud and defend yourself from identity theft, is to freeze your credit report with each of the three major credit bureaus—Experian, TransUnion, and Equifax. 

Placing a credit freeze on your credit report will stop identity thieves from being able to open new accounts, lines of credit, or make any large purchases in your name, regardless of whether or not they have your Social Security number or any other sensitive information. 

What a credit freeze means

A credit freeze is a process that shuts off access to your credit reports at your request. Without your verified consent, your delicate information cannot be acquired. This means that if someone were to attempt to apply for credit in your name, your report would come up as “frozen,” and therefore the creditor would not be able to see the information needed for the application to be approved.

You can unfreeze your credit at any time by using a PIN or a password. 

Reasons to freeze your credit

It might be a good idea to freeze your credit if you’re experiencing any of the following situations:

  • Your data has been compromised in a data breach: It happens. If you’ve been a victim of a data breach and personal information related to your identity has been leaked or made vulnerable to cyber criminals, a credit freeze can offer you some extra protection. 
  • You have reason to think you’ve been a victim of identity theft: Perhaps you’ve checked your credit recently and noticed open accounts that you don’t recognize. Maybe you’ve been getting phone calls from collections agencies requesting payments from accounts you know you didn’t open. While a credit freeze won’t be able to stop them from using accounts a thief has already opened, it can stop them from opening any more. 
  • You want to protect your child from identity theft: According to the Economic Growth, Regulatory Relief and Consumer Protection Act, parents and legally guardians of children 16 years old and younger have the right to open a credit account for their child with the sole purpose of putting a freeze on it to protect them from identity theft. 

How to freeze your credit 

The process of freezing your credit is simple but does require a few steps. You will need to get in touch with each of the three major credit bureaus one by one and request a credit freeze:

  • Experian: Contact by phone at 800-349-9960 or go to their website.
  • Equifax: Contact by phone at 888-397-3742 or go to their website.
  • TransUnion: Contact by phone at 888-909-8872 or go to their website.  

The credit bureaus will ask you for your Social Security number, your date of birth and other information to verify your identity.

Once you freeze your credit, your file will be unattainable even if a thief has sensitive information such as your social security number or date of birth. If you need to use your credit file, you can unfreeze your credit report at any time. 

How to unfreeze your credit

Once you’ve frozen your credit file, it will be remain blocked until you decide that you would like to unfreeze it. You will need to unfreeze your credit report in order to open a new line of credit or make a major purchase. 

Unfreezing your credit file is simple. All you will need to do is go online to each credit bureau website and use the personal identification number (PIN) that you used to place the freeze on the account. If you don’t want to complete this task online, you can also unfreeze your credit file over the phone or through postal mail. 

When the unfreezing process is done online or by phone, it is completed within minutes of submitting the request. However, if you send your request via mail, it will take much longer. 

Keep in mind that you don’t necessarily need to unfreeze your credit through all three of the major credit bureaus if you don’t want to. For instance, let’s say you plan to apply for credit somewhere. You can ask the creditor which credit bureau it will go through to pull up your report, and only unfreeze that one credit bureau. 

You may also have the option to unfreeze for a specific amount of time. Once the time is up, your credit file will automatically freeze again. 

Credit freeze pros and cons

There are a few reasons why you might want to freeze your credit in this day and age, but just like with anything else, there are pros and cons to credit freezing. Here is a general breakdown of the benefits and downfalls of putting a freeze on your credit report:

Pros:

  • It prevents thieves from opening new lines of credit: With a credit freeze placed on your account, no one will be able to open a new line of credit or any other type of account requiring a credit check using your personal data. Anyone trying to commit fraud will be stopped in their tracks as soon as lenders notice that the report is frozen. 
  • It won’t affect your credit score: Freezing your credit report will not damage your credit score. Additionally, if you’ve been a victim of identity theft, freezing your credit report could actually protect your credit score from being damaged due to fraud. 
  • It’s free: It used to be the case that some credit freezes would cost a fee, but that is no longer the way it works. 

Cons

  • It requires some effort: Putting a credit freeze on your credit report takes some effort. You will need to get in touch with all three credit bureaus. 
  • You will need to remember your PINs: A PIN is required to lift or freeze your credit report. If you lose it, you will need to jump through extra hoops to create a new one.

It can’t stop thieves from accessing your existing accounts: Credit freezes can only stop fraudsters from opening new accounts using your information. If you’ve already been a victim of identity theft, a credit freeze can’t block thieves from committing fraud with your current accounts. This means that thieves can still make a purchase using a credit card they stole from you.

Source: pocketyourdollars.com

The Top 6 Objections to Reverse Mortgages

At NewRetirement we understand how hard it is to save enough cash for retirement. We hear awful stories of seniors suffering financially.

However, many of you have paid off or paid down your mortgages and actually have substantial savings in your home equity. If you are rich in home equity but cash poor, a reverse mortgage might give you the financial breathing room you need.
how reverse mortgages work
While a reverse mortgage is not right for everyone, sometimes the only thing holding us back from really looking at the product is a stronger understanding of how reverse mortgages work.

By addressing some of the top objections that we hear about Home Equity Conversion Mortgages (HECM) (also known as reverse mortgages), we hope to help our readers understand just how useful these loans can be. We invite you to do yourself a favor and approach this with an open mind, as some of these answers may surprise you! Here are the biggest reverse mortgage objections.

This is the most repeated objection we hear from retirees, most often from those who are closer to age 62.

A reverse mortgage does not cause you to sell your home. You are the only person on the title and you retain all ownership. A reverse mortgage is just a loan that allows you to access an advance on a portion of your home equity. This is the reason you and your spouse (if applicable) are able to continue living in the home indefinitely. You still “own” your home the same way you would with a traditional mortgage.

The amount of home equity you can access through a HECM generally starts at about 50% of your home’s value at the earliest age you are eligible for this type of product, which is age 62. As you get older, the percentage of the home’s value you qualify for increases.

In fact, the limited loan amount is actually good news for two reasons:

Although a reverse mortgage is designed to help retirees age in place, having a smaller balance allows you to exit the home earlier if that is what you need.

If you find that your life plan has suddenly changed, and you want to downsize or relocate, you can pay off your reverse mortgage and use the remaining proceeds from the sale of your home to accommodate that change in location.

Establishing a HECM line of credit earlier rather than later allows you to grow your line of credit over time. It also allows you to lock in your home’s current value since the HECM benefit doesn’t drop if home prices go down. It’s a little known fact that a reverse mortgage line of credit grows year after year. Some think of it as a guaranteed annual limit raise on your credit card.

This line of credit is similar to a traditional Home Equity Line of Credit (HELOC) but there are some interesting differences. Once your reverse mortgage line of credit is established it cannot be revoked unless you default on the terms of your loan. What’s more, a reverse mortgage line of credit does not have income requirements as long as you can prove your creditworthiness by submitting to a lender’s financial assessment.

The line of credit grows every year because the unused portion of the credit line grows with your loan interest plus the mortgage insurance premium renewal. That means the longer you wait to tap your line of credit, the more credit you have to borrow against.

Once you lock in your appraised value for the purpose of a reverse mortgage, market value decreases do not affect what is available to you on your monthly payments or reverse mortgage line of credit going forward.

Many consumers understand that borrowing from your own equity is not the same as selling your home, but they still may think the amount they qualify for is too little.

Keep in mind, when you convert your home equity to available cash, it is important for that money to last in retirement. You also want to continue to have a stake in your home value, which is represented by the equity reserves remaining in your home. As those equity reserves become depleted, the true ownership percentage in your home gets smaller over time.

The restrictions on HECMs were put in place by the government to nudge borrowers away from borrowing too much, too soon.

That said, if you establish a reverse mortgage line of credit now, it’s there as a security blanket, when you really need it. If you don’t need it for 10 years, your line of credit will grow substantially over that time, and could possibly be more than the market value of your home over time.

Many consumers argue that the fees involved with a reverse mortgage transaction are too high, while those of us who have taken advantage of lower interest rates to refinance our mortgage balances are less sensitive to the closing costs involved.

People who have looked at refinancing their home loans know that there are costs involved and they should consider the cost of refinancing versus the potential savings over time that a more favorable interest rate might bring.

Being that this loan is designed as a longer term way to access your home equity, you should realize that most of these closing fees are not “out of pocket” costs, but are deducted from the gross proceeds of your reverse mortgage loan.

Just like a traditional refinance, it’s also important to put reverse mortgage fees into perspective by amortizing them over the life of your loan. Most consumers who take out a reverse mortgage plan to stay in their home for at least 15 to 20 years.

When the closing costs are viewed long term, it should be considered a trade-off for not having to make a monthly mortgage payments going forward combined with the security and flexibility that come with having access to your home equity.

You may think you don’t need the extra money now, but when an unexpected financial crisis hits, accessing your home equity last minute with a reverse mortgage is not easily done. This type of loan can take upwards of 45-90 days to fund. Having a reverse mortgage line of credit available can be smart for several reasons:

  • It’s there if you need it, and the bank cannot pull the line of credit if your finances change.
  • It grows over time, so the amount of equity you can access becomes larger year over year.
  • When the market isn’t performing, you can draw from your equity instead of liquidating investments. When the market is doing well, pay your line of credit back if you want to keep the balance low.

A reverse mortgage line of credit is utilized by planners who like to have a backup strategy. It’s not a matter of needing the money now, but it can be used to avoid being up against a wall when the need arises.

Not all parents are generous enough to want to leave a financial legacy to their children. Unfortunately that financial legacy comes at the price of you passing away.

How nice would it be to help your children or grandchildren while you are still alive? If your children or grandchildren need financial assistance now, you can draw down a portion of your home equity to do that. And you get to see the benefit it provides them.

Finally, if you get a HECM and don’t use up your home equity, then any remaining equity is available for your heirs.

It is most often those who misunderstand the product or don’t know the facts about reverse mortgages, who say it’s a terrible idea. The fact of the matter is that reverse mortgages are not for everyone, but they help many seniors live better while remaining self-sufficient.

Reverse mortgages are not a good idea for someone who plans on relocating within a few years or needs to go into assisted living. It’s also probably a bad idea for a person who isn’t responsible with their savings.

Ask the person who was able to retire at 65 instead of 70 how much of a terrible idea it was! It’s time to really enjoy your golden years. According to scholars at the Ohio State University, “Reverse mortgage borrowers have significantly higher financial and housing satisfaction compared to nonborrowers.”

If finances are holding you back from truly loving retirement, and you have a nest egg in your equity, you deserve better. A better retirement is within reach!

The best way to keep your options open and truly evaluate this strategy is to start with one or several free written proposals from a credible lender. A written proposal will answer all your questions about interest rates, closing costs, monthly drawdown amounts, and even provide an amortization schedule so you can see how your line of credit and the accumulated balance grows over time.

Source: newretirement.com