CMPS Mortgage Products & Financial Strategies 5 — Questions and Answers
Question 1: 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?
- The borrower receives a lower interest rate in exchange for the fees
- The loan balance is higher, increasing the amount on which interest accrues (Correct answer)
- The loan term is automatically extended to 40 years
- PMI is required regardless of LTV
Correct 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.
Question 2: Which of the following is a key feature of a conforming loan sold to Freddie Mac or Fannie Mae?
- It must be insured by FHA
- It must comply with GSE underwriting guidelines and loan limits (Correct answer)
- It cannot be used for investment properties
- It requires a minimum 20% down payment
Correct 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.
Question 3: 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?
- 0.83
- 1.00
- 1.20 (Correct answer)
- 1.50
Correct answer: 1.20
DSCR = $2,400 ÷ $2,000 = 1.20, meaning the property generates 20% more income than needed to service the debt.
Question 4: 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?
- The initial fixed period before the first adjustment
- The maximum rate increase at the first adjustment
- The maximum lifetime rate increase above the initial rate (Correct answer)
- The margin added to the index at each adjustment
Correct 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.
Question 5: 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?
- Debt elimination strategy
- Mortgage arbitrage or leverage strategy (Correct answer)
- Equity acceleration plan
- Debt consolidation refinance
Correct 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.
Question 6: When a borrower uses a cash-out refinance, how is the cash-out portion of the loan typically treated for income tax purposes?
- It is considered taxable income in the year received
- It is not taxable because it represents borrowed funds, not income (Correct answer)
- It is taxable only if the funds are used for non-home purposes
- It is always deductible as a business expense
Correct 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.
Question 7: 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?
- Refinance to a 10-year fixed-rate mortgage
- Make bi-weekly payments equal to half the monthly payment
- Make one extra principal payment per year applied directly to principal
- All of the above can accelerate payoff; the best choice depends on the client's cash flow flexibility (Correct answer)
Correct 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.
CMPS Mortgage Products & Financial Strategies 5
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?