Ok, here's the basics. Our credit is not very good due to a few late payments and the few credit cards we have being very close to being maxed out. Our current mortgage is for $188,000. Our home is worth at least $360,000. Our current mortgage is an interest only, (6.05%) about to go to a variable rate so we want to refinance. Our current payments (mortgage, auto loan and credit card bills) equals a monthly payment of $2250

We have been offered a 30 year fixed mortgage at 7% interest for $1800/month. The amount will pay off our current mortgage, hubby's truck, and all our bills. It does include property taxes and insurance. Plus give us around $10,000 cash out. (we don't want the cash out so we plan on paying it right back to principle)

So even though 7% interest isn't ideal, is it better to get a fixed rate and actually be paying towards the principle? (rather than our current interest only situation)

Thanks
Additional Details
Thanks for your responses. I should have added that we have gained a handle on all our our finances. We have over one year of perfect credit, but as you all know- any late payments stay on your credit for at least 7 years. (we had a death in the family which put us in a bind, we did fall behind on a couple of our smaller bills)

A better question for me to ask would have been: is a 7% fixed better than having the interest only loan that we've had for the last 2 years go variable?

And to further comment....The new loan would only be for $240,000. Thank you very much {not} for judging us and saying that we wouldn't put the extra cash out back into the loan towards the principle. That IS what we are doing if we go to this loan. Which leaves us roughly with $130 in equity. I didn't ask for comments or judgements on our spending habits.