CMA Wealth Building with Mortgages 2 — Questions and Answers
Question 1: A homeowner uses a cash-out refinance to fund a rental property down payment. What is the primary wealth-building advantage of this strategy?
- Eliminates PMI on the original mortgage
- Leverages existing equity to acquire an income-producing asset (Correct answer)
- Converts non-deductible interest to deductible interest
- Reduces the remaining loan term on the primary residence
Correct answer: Leverages existing equity to acquire an income-producing asset
Cash-out refinancing allows homeowners to leverage built-up equity to fund income-producing investments, multiplying wealth-building potential.
Question 2: Which mortgage strategy involves making one extra payment per year to significantly reduce total interest paid over the loan term?
- Interest-only mortgage
- Biweekly payment plan (Correct answer)
- Graduated payment mortgage
- Balloon payment mortgage
Correct answer: Biweekly payment plan
A biweekly payment plan results in 26 half-payments (13 full payments) per year, reducing principal faster and saving substantial interest.
Question 3: An investor purchases a duplex with an FHA loan and lives in one unit while renting the other. This strategy is commonly called:
- Wholesaling
- House hacking (Correct answer)
- BRRRR method
- Seller financing
Correct answer: House hacking
House hacking involves living in one unit of a multi-family property while renting the others to offset or eliminate housing costs.
Question 4: What does the debt service coverage ratio (DSCR) measure in investment property lending?
- The ratio of loan amount to property value
- The borrower's personal credit score threshold
- The property's net operating income relative to its debt obligations (Correct answer)
- The percentage of rental income used for maintenance
Correct answer: The property's net operating income relative to its debt obligations
DSCR measures whether a property generates enough income to cover its debt payments, calculated as NOI divided by total debt service.
Question 5: A homeowner accelerates mortgage payoff by applying annual bonuses directly to principal. This primarily builds wealth by:
- Increasing the property's market value faster
- Reducing total interest paid and building equity more quickly (Correct answer)
- Qualifying the homeowner for a higher credit limit
- Lowering the property tax assessment
Correct answer: Reducing total interest paid and building equity more quickly
Applying lump sums to principal reduces the outstanding balance, shortening the loan term and significantly decreasing total interest costs.
Question 6: Which type of mortgage product offers wealth-building potential through an adjustable rate that may decrease if market rates fall?
- Fixed-rate mortgage
- Adjustable-rate mortgage (ARM) (Correct answer)
- Reverse mortgage
- Shared appreciation mortgage
Correct answer: Adjustable-rate mortgage (ARM)
ARMs can benefit borrowers when rates decline, potentially reducing monthly payments and freeing capital for other investments.
Question 7: When using the BRRRR strategy, what does the final 'R' stand for?
- Refinance
- Rent
- Repeat (Correct answer)
- Renovate
Correct answer: Repeat
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat — the final step is to repeat the process using the refinanced capital.
CMA Wealth Building with Mortgages 2
A homeowner uses a cash-out refinance to fund a rental property down payment.
What is the primary wealth-building advantage of this strategy?