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A Hybrid Mortgage, also called a Fixed Period ARM takes the shape of both the Fixed Rate Mortgage and the Adjustable Rate Mortgage. The terms of the mortgage begin with a period of fixed interest which is usually 3, 5, 7 or 10 years. After the fixed period the Hybrid Mortgage converts to an Adjustable Rate Mortgage for the remainder of the loan (20, 23, 25 or 27 years).

In addition to the form of Hybrid Mortgage mentioned above there is a Two-Step Mortgage that retains more properties of a Fixed Rate Mortgage. Like the Fixed Period ARM this Hybrid Mortgage has a fixed interest rate for 5 or 7 years and adjusts to prevailing market rates after the specified period. However, after the rate adjusts to current market rates the mortgage remains at that rate for the life of the loan. The terms of the Two-Step Hybrid Mortgage are 5/25 and 7/23. The first number refers to the length of the first fixed period (in years) and the latter refers to the length of the second fixed rate period (in years).

The benefits to a Hybrid Mortgage include a low initial interest rate, low monthly payments, the ability to afford a higher value home and significant savings if the borrower plans to sell or refinance before an interest rate hike. With a Hybrid Mortgage the borrower agrees to absorb some of the interest rate risk opposed to a Fixed Rate Mortgage where the lender assumes all of the risk of rising interest rates. This allows for lower initial rates and, consequently, lower initial monthly payments. The ability to afford a more expensive home follows this. From an investment standpoint if interest rates are low and expected to rise a Hybrid Mortgage is a good idea if the borrowers intends to sell the home or refinance within the initial fixed rate period. This is referred to as "refinance risk." If the borrower is unable to sell or refinance they are stuck with a higher rate and, consequently, the higher mortgage payments.

Some of the drawbacks to a Hybrid Mortgage include a high monthly payment if interest rates increase and the refinance risk mentioned above. Since Hybrid Mortgages are typically used when rates are low it's almost certain that rates will be higher after the fixed rate period. This increases the risk on borrowers. If a borrower maximizes their home buying potential with a Hybrid Mortgage they are risking not being able to afford the payments when the rates rise. To mitigate this it's a good idea to make sure the Hybrid Mortgage doesn't have a prepayment penalty (a lump sum paid to the lender for paying early or refinancing) so it's possible to sell or refinance within the fixed rate period.