CMPS Debt and Cash Flow Management 3

Question 1

Which debt repayment strategy focuses on paying off the highest-interest debt first while making minimum payments on all others?

Accepted Answer

Avalanche method

Answer

The avalanche method targets the highest-interest debt first, minimizing total interest paid over time.

Question 2

A client has a $250,000 mortgage at 7% and $30,000 in credit card debt at 22%. A CMPS would most likely recommend which strategy first?

Accepted Answer

Aggressively pay down credit card debt

Answer

The 22% credit card interest rate far exceeds the 7% mortgage rate, making credit card payoff the highest-priority move.

Question 3

What is the primary purpose of a cash flow statement in mortgage planning?

Accepted Answer

To identify income and expense patterns that affect loan repayment capacity

Answer

A cash flow statement reveals income sources and spending patterns that determine a borrower's true repayment capacity.

Question 4

A borrower uses a cash-out refinance to pay off $40,000 in student loans. Over 30 years, what financial planning concern should the CMPS raise?

Accepted Answer

The borrower may pay significantly more in total interest by extending 10-year debt over 30 years

Answer

Extending short-term debt into a 30-year mortgage can dramatically increase total interest paid even at a lower rate.

Question 5

Which ratio measures a business borrower's ability to service debt from operating income, commonly used in self-employed mortgage analysis?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

DSCR divides net operating income by total debt service obligations, indicating whether income covers debt payments.

(CMPS) Certified Mortgage Planning Specialist Practice Test