What is meant by the term "collar" in mortgage agreements?

The term "collar" in mortgage agreements refers to a mechanism that establishes both a minimum and maximum interest rate on an adjustable-rate mortgage (ARM). However, specifically, within the context of this question, the collar typically denotes a minimum interest rate that the mortgage cannot drop below. This is particularly beneficial for lenders as it ensures a baseline of return on the loan regardless of market fluctuations.

By defining a minimum rate, borrowers gain the security of knowing their interest payments won't fall below a certain level, even if market rates decline significantly. This feature is particularly useful in volatile interest rate environments, providing both protection and predictability in the cost of borrowing over time.

In essence, while a collar can incorporate both a minimum and maximum rate, the specific mention of a minimum interest rate is what aligns with the correct definition in the context of this question.