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Floor

Floor Definition

(1) the minimum allowable interest rate decrease for adjustable rate mortgages. Floors embedded in mortgage agreements may limit the amount of downward change in the rate of interest at each adjustment period and provide a fixed minimum below which the rate cannot drop during the life of the loan. (2) an agreement negotiated between a buyer and seller. The buyer of a floor agreement pays a fee to the seller. In return, the seller will pay the buyer if a designated floating index rate is lower than a specified fixed rate on designated days. The seller pays nothing if the floating rate is above the fixed rate. Buyers of floor agreements use them to hedge against falling interest rates, because payments to the buyer increase as rates rise. See cap. See collar.

RELATED TERMS
Cap
Collar




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