In the last five years, the rate of homeowners refinancing their mortgages has skyrocketed. The decrease in interest rates has resulted in several homeowners locking in a low rate. In addition to refinancing for a lower fixed rate, some homeowners have chosen to refinance their home using an interest only option. While making interest only payments is tempting, these types of loans have certain risks.

What are Interest Only Mortgage Loans?

Interest only mortgage loans are rather new. With these loans, homeowners have the option of paying only the loan interest for a specified period. Most interest only loans have a term of five years. However, it is possible to obtain a seven or ten year interest only option. At the end of the interest only period, the homeowner must begin making payments toward the principal and interest. When this occurs, the mortgage payment will increase.

Interest only payments are beneficial because your monthly mortgage payment is considerably less. If you live in a high housing market, an interest only mortgage may be your only way to attain homeownership. However, these loans are very dangerous. Once you begin paying on the principal, you can expect your mortgage payment to jump $300 to $500. If you are unable to handle a higher payment, you are at risk of losing your home.

Combining Fixed Rate and Interest Only Refinancing

Fortunately, there is a way to enjoy the predictability of a fixed rate, and the financial comfort of interest only payments. Obtaining a refinance loan with a fixed rate-interest only combo is easy. Refinance lenders offer several loan options to meet your needs.

With a fixed rate-interest only option, homeowners have the security of a fixed rate 15 or 30 year mortgage. These include predictable payments that will remain the same. However, if a homeowner needs extra cash for an unexpected expense, they can utilize their interest only option, and pay a lesser mortgage amount for a particular month. Paying a lower mortgage payment when money is tight will help you maintain a good standing with your creditor, and will not damage your credit rating.

See my recommended Home Mortgage Refinance Lenders for the lowest rates online.

Carrie Reeder is the owner of ABC Loan Guide.