Final answer:
Choosing a balloon or an adjustable-rate mortgage (ARM) can be beneficial for short-term homeownership due to lower initial rates. ARMs offer lower initial interest rates that adjust with the market, while balloon mortgages have lower payments but a large end-term payment.
Step-by-step explanation:
It can be a good idea to opt for a balloon or an adjustable-rate mortgage (ARM) if you plan on staying in a home for less than 5 years. Specifically, an ARM provides a loan where the interest rate varies with market interest rates. This can often mean a lower initial interest rate compared to fixed-rate loans because the lender mitigates the risk of higher inflation diminishing the real value of payments received. However, if market interest rates rise, then so will the interest rate on an ARM, which can significantly increase your future loan payments. A balloon mortgage, on the other hand, typically offers lower rates and monthly payments initially, but requires a significant lump-sum payment at the end of the loan term, which might be manageable if you anticipate selling the property before this balloon payment is due.