Mortgage Products & Financial Strategies Flashcards
7 cards from real CMPS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Mortgage Products & Financial Strategies flashcards as text
A lender offers a 'no-cost' refinance by rolling closing costs into the loan balance rather than charging them upfront. What is the primary trade-off?
Answer: The loan balance is higher, increasing the amount on which interest accrues
Rolling closing costs into the loan increases the principal balance, meaning the borrower pays interest on those costs over the life of the loan.
Which of the following is a key feature of a conforming loan sold to Freddie Mac or Fannie Mae?
Answer: It must comply with GSE underwriting guidelines and loan limits
Conforming loans must meet GSE standards for credit, documentation, and loan size limits in order to be purchased by Fannie Mae or Freddie Mac on the secondary market.
An investor purchases a rental property with a DSCR loan. The property generates $2,400/month in rent and the proposed PITIA payment is $2,000/month. What is the DSCR?
Answer: 1.20
DSCR = $2,400 ÷ $2,000 = 1.20, meaning the property generates 20% more income than needed to service the debt.
A client is evaluating an ARM with a 5/1 structure and caps of 2/2/5. What does the '5' in the cap structure represent?
Answer: The maximum lifetime rate increase above the initial rate
In a 2/2/5 cap structure, the third number (5) represents the lifetime cap — the maximum the rate can increase above the initial note rate over the life of the loan.
Which of the following financial strategies uses a mortgage to free up capital for higher-yielding investments, based on the concept that borrowed money can generate returns exceeding the loan cost?
Answer: Mortgage arbitrage or leverage strategy
Mortgage arbitrage involves intentionally maintaining a mortgage and investing the freed capital in assets expected to return more than the after-tax mortgage rate.
When a borrower uses a cash-out refinance, how is the cash-out portion of the loan typically treated for income tax purposes?
Answer: It is not taxable because it represents borrowed funds, not income
Cash-out refinance proceeds are not taxable income because they represent loan proceeds (borrowed money), not earned income; however, interest deductibility depends on how the funds are used.
A CMPS professional is advising a client who wants to pay off their mortgage in 10 years instead of 30. Which strategy achieves this with the least refinancing cost?
Answer: All of the above can accelerate payoff; the best choice depends on the client's cash flow flexibility
All three strategies accelerate payoff; the optimal approach depends on the client's budget flexibility, rate environment, and refinancing costs relative to interest savings.