It depends. You need to take everything into consideration when taking out a loan. To me, variable or arm or interest only products are just like other loans, they have their purpose. You may know that military people move around a lot. When they’re moving every 5-7 years, why not get a 7 year arm that they pay a fixed interest payment on every year? Why would they want to pay prinicple on something that they really don’t have an emotional or investment attachment to? Maybe your just starting a family and want the extra money? Some people are money savvy and think that by playing the arm game that they can keep more money to themselves. Arm’s/variable mortgage are not for everyone, that’s where a mortgage professional comes in to understand the entire situation and customize a mortgage solution to not only fit immediate needs, but long term goals as well

This is a great site about home loans.

There could be a balloon, but not necessarily. That’s just another factor to consider, like a “prepayment penalty”.

The reason why people take Variable rates is fairly simple. The rate is initially “fixed”, often for two years. All other things being equal, that initial interest rate is usually lower than what they could get with a 30 year fixed rate. The “plan” is to refinance before it goes up.

Where people get caught is when they are unable to refinance after that time, whether because they didn’t fix their credit, or the interest rates went up so much that they can’t afford the going rate, or the home value went down. I suspect that most of the foreclosures going on now are people that intended to refinance before the rates varied, but didn’t or couldn’t.

Anyone taking a variable rate now with such a plan is in for an upleasant surprise when they get to the part of the plan where they refinance at a fixed rate.

Because they often start out less than fixed rate and it’s a somewhat tricky way to fool people into taking a bigger loan than they can afford.