You're going to find everything you're looking for in Northern New Mexico!
First, I would normally say to apportion more nights to Santa Fe than to Albuquerque. I love both cities, but in terms of opportunities for the visitor, Santa Fe has more. (Albuquerque definitely has its charms, too, and should not be skipped.)
However, you really should base your plans around what you intend to do with the Balloon Fiesta. It's always good to plan on possibly being there more than one day. Weather can impact whether the mass ascensions will in fact ascend. Having more than one possible day may help avoid disappointment.
In Albuquerque it is definitely not necessary to stay in Downtown. In fact as a visitor, that wouldn't be my first choice. I always stay near Old Town (Monterey Non-Smokers Motel) when I visit Albuquerque. But essentially Albuquerque is much more spread out and you'll need to drive to most places you plan to go anyway.
In Santa Fe, though, I highly recommend staying in walking distance to the Plaza (downtown). Definitely worth the higher price tag IMHO for dining, shopping, sightseeing, etc.
If you make it a 9 day trip, I'd suggest adding Taos to the mix with at least a 1 night stay and preferably 2. Taos is a different experience. More laid back and I think opens up its charms better when overnighting. There are many who are disappointed when they just head up as a day trip from Santa Fe (although many others do enjoy it as well). Key places to visit include Taos Pueblo, the Rio Grande Gorge Bridge and the Millicent Rogers Museum. Lots of shops and galleries (although not on the scale of Santa Fe) and terrific places to eat. Also check out the church in Rancho de Taos.
When travelling to or from Taos you have the option of the low road or the high road. Its recommended to travel on each. My own preference is the low road TO Taos and the high road FROM Taos. Others prefer the other way.
When travelling to or from Santa Fe you also have two options, I-25 and the Turquoise Trail. Again, do both. My own preference is to go north on I-25 and south on the Turquoise Trail, but its not critical.
In Santa Fe lots of historical options with the museums, especially the New Mexico Museum of History/Palace of the Governors and the Museum of Indian Arts and Culture. Several excellent art museums as well.
Consider a drive out to Bandelier National Monument from Santa Fe. DO take the hike in the separate Tsankawi section, my favorite part of Bandelier. Perhaps visit Los Alamos on this day. (Los Alamos Historical Museum and Bradbury Museum are small, free and worthwhile.)
If you're up for a 3 mile round trip hike I highly recommend Kasha-Katuwe Tent Rocks National Monument between Santa Fe and Albuquerque (could fit in when driving the I-25 portion between Albuquerque and Santa Fe).
Lots more I could recommend, but a little short on time (otherwise I would have give you the links above...just Google!) But here are three helpful sites to help you in your planning:
http://www.itsatrip.org/ (for Albuquerque tourism)
http://www.santafe.org/ (for Santa Fe tourism)
http://taos.org/ (for Taos tourism)