DEFINITION of 'Discretionary ARM'

An adjustable-rate mortgage on which the lender has the right to change the interest rate at any time, by any amount, subject only to the borrower being given a certain period advanced notice. This differs from a more structured adjustable-rate mortgage on which the interest rate consists of an index value plus a margin, adjusts only on predetermined dates and is limited by an interest rate cap structure.

BREAKING DOWN 'Discretionary ARM'

Discretionary ARMs do not exist in the United States, but are popular mortgages in Europe and other developed countries where fixed-rate mortgages are rare. ARMs that are offered in the United States can be more difficult to understand than discretionary ARMs, but they offer the borrower greater protection from interest rate movements.

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