Many people find that interest only refinance loans meet their needs. This type of loan can be very beneficial if you are looking to refinance in order to lower your payments for a time. However, the main drawback to an interest only refinancing option means that you will have to begin paying on the principal at some point, meaning that your payments will balloon. But there are certain types of people who can make an interest only refinance work better than the original mortgage.

What is an interest only refinance?

This type of refinancing is characterized by the fact that for the first 7 to 10 years of a 30-year loan the only payments required are payments on interest. You do not have to pay on the principal until you reach the point in your term where it becomes necessary. It is possible to refinance your original mortgage so that it is an interest only loan, allowing you to drastically lower your monthly payments. If you have good credit, your interest rate can be low as well.

The main interest only drawback

The main drawback to an interest only refinance comes in the fact that once the first part of the loans term ends, you have to begin paying on the principal. Your payments balloon, sometimes doubling or tripling in size. Choosing an interest only refinance option for your mortgage means that you have to carefully evaluate the chances that you will be able to handle the ballooning payments 7 to 10 years down the road.

Who can handle an interest only refinance?

These refinance loans can be good fits for certain people. Those who have a high tolerance for risk and are willing to attempt to successfully parlay the difference between payments for their old mortgage and the new interest only refinance into greater wealth through investing can find that not only do they have the ability to make the higher loan payments, but that they also have built a tidy bit of wealth as well. Here are some of the other characteristics those who can handle an interest only refinance:

Someone whose future earning prospects are high
Someone who has an income based on commissions and bonuses
Mid-level executives who receive annual or semi-annual performance bonuses
Business owners and the self-employed who need low payments for lean months

One good plan in such cases is to take advantage of the low payments during lean months, and then pay down large chunks of the principal when bonuses arrive, or during high commission months. This means that when the principal has to be paid, balloon payments wont be as high.