What does the Regulation Z disclosure provide for an adjustable rate mortgage (ARM) loan?

The Regulation Z disclosure, which is part of the Truth in Lending Act, requires lenders to provide borrowers with specific information regarding the cost of credit. For an adjustable rate mortgage (ARM) loan, this disclosure must include the annual percentage rate (APR) for the first adjustment period. This is essential because ARMs typically have interest rates that change after an initial fixed period, and understanding the APR can help borrowers grasp the cost associated with their loan during that period.

The APR provides a broader measure of the cost of borrowing than just the interest rate, as it factors in other costs like points, broker fees, and certain closing costs, thus allowing borrowers to make informed comparisons between different loan offers. This transparency is critical in helping consumers understand the potential changes to their mortgage payments in the future as rates increase or decrease after the first adjustment period.

In contrast, the fixed rate for the loan term, while relevant for traditional fixed-rate mortgages, does not apply to ARMs, which inherently feature variable rates. Similarly, the interest rate for the entire term doesn't provide relevant insight into how the rate will adjust in an ARM scenario, and the monthly payment amount can fluctuate with changes in interest rates, making it less relevant in the initial disclosure phase.