Clark Howard's Tips

July 7, 2008

Some of the largest banks in our nation made aggressive marketing moves to get people locked into what Clark calls "the dumbest mortgage products ever." We're talking about option payment loans, also called negative amortization loans or Pick-a-Payment loans.

Thankfully, Washington Mutual and Wachovia are both moving away from these loans. Clark recalls negative amortization loans were popular in the mid-1980s and led to a wave of bank collapses and foreclosures during that decade.

With a negative amortization loan, your balance actually goes up over time. That's because you're given the option to pay whatever you want. The unpaid balance each month simply gets added on to the tail end of the loan. When home values drop, you're suddenly quite upside down in your home.

Clark recalls the first time he took a call about a negative amortization loan in 2000 or 2001. A woman called up to ask about an offer she received for a 30-year mortgage at 1 and seventh-eighths percent. But that's only what the monthly payments were based on; her loan balance would continue going up month after month. Ultimately, this is poison for your pocketbook.

There's a simple rule of thumb Clark tells people to follow when shopping for a mortgage: See what you qualify for when it comes to a traditional 30-year fixed rate loan. Then back off and go house shopping at only 90% of what you'd be approved for. So if you qualify for a $200K mortgage, don't look at houses above $180K. This will give you some financial wiggle room over the years.

People have mistakenly thought that stretching to buy a home creates wealth. But it's like more like a rubber-band -- stretch it too far and it will break.

Mortgage disclosure statements are so complex that even the educated don't know what they're signing. The American Enterprise Institute has drawn up a mortgage cheat sheet (and definition of terms) that you can use as a plain-English disclosure when getting a loan. (Editor's note: The first link is a pdf file.)

Consumer advice courtesy of