A Discretionary ARM is an adjustable rate mortgage on which the lender has the right to change the interest rate at any time subject only to advance notice.

The discretionary ARM is at the opposite pole from Indexed ARMs on which rate adjustments are completely rule-based.

Discretionary ARMs are found abroad, not in the US. Since the announced rate change is a policy decision made by the lenders board of directors, it is subject to outside scrutiny.

Another drawback of discretionary ARMs is that there is no way to vary the amount of interest-rate risk imposed on borrowers based on their ability to bear risk. All borrowers are subject to the same risk of a rate increase.