Questions and Answers

No one knows what the interest rate will do over the term of the loan. So Regulation Z (Truth-in-Lending) requires that the creditor calculate all the disclosures, including the APR, on the assumption that the initial rate stays in effect over the entire term. The Regulation then requires that the creditor make some additional disclosures that inform the consumer that the rate may increase and what effect an increase will have on payments. (Will it increase the amount or number of payments, or increase only the final payment?) 

If the loan has a discounted or premium initial rate, however, the disclosures should be calculated assuming a composite interest rate—with the discounted or premium rate assumed to be in effect for the initial discount or premium period as the note provides and then the rate that would have been in effect but for the discounted or premium rate in effect for the remainder of the term. Again, additional disclosures that inform the consumer that the rate may increase and what effect an increase will have on payments are required. 

See the Commentary to Regulation Z at 12 CFR 226, Commentary, Section 17(c)(1)-8.