You simply have 3/1 ARM where the rate is fixed for the first three years and then the rate is variable each year thereafter.
If you fix the rate a 8.5% for the first three years then you do have a discounted ARM because the initial rate is not based on the index plus the margin. Your initial rate as described above would be discounted by 1.75%.
This has to be disclosed in your ARM program disclosure and your TIL would have to show how the rate is affected at the change date based on your cap limitations.
On a $150,000 loan with a lifetime cap of 6% and a periodic cap of 2% your TIL would look something like:
36 monthly payments of $1301.73 beginning 9/1/20007 and 204 monthly payments of $1454.30 beginning 9/1/2010
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.