CMPS Debt and Cash Flow Management 3 — Questions and Answers
Question 1: Which debt repayment strategy focuses on paying off the highest-interest debt first while making minimum payments on all others?
- Snowball method
- Avalanche method (Correct answer)
- Debt consolidation
- Balance transfer method
Correct answer: Avalanche method
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?
- Refinance the mortgage to a 15-year term
- Aggressively pay down credit card debt (Correct answer)
- Make extra principal payments on the mortgage
- Open a HELOC to fund retirement accounts
Correct answer: Aggressively pay down credit card debt
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?
- To document a borrower's net worth
- To identify income and expense patterns that affect loan repayment capacity (Correct answer)
- To calculate the loan-to-value ratio
- To verify employment history
Correct answer: To identify income and expense patterns that affect loan repayment capacity
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?
- Student loans are tax-deductible, so paying them off is counterproductive
- The borrower may pay significantly more in total interest by extending 10-year debt over 30 years (Correct answer)
- The borrower will lose access to income-driven repayment plans only if they are in default
- Student loan debt cannot legally be refinanced into a mortgage
Correct answer: The borrower may pay significantly more in total interest by extending 10-year debt over 30 years
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?
- Loan-to-value ratio
- Debt service coverage ratio (DSCR) (Correct answer)
- Liquidity ratio
- Current ratio
Correct answer: Debt service coverage ratio (DSCR)
DSCR divides net operating income by total debt service obligations, indicating whether income covers debt payments.
Question 6: A CMPS client has significant credit card balances and is considering a 0% balance transfer offer. What is the most important factor to evaluate?
- The cardholder's credit score impact from a new inquiry
- The promotional period length and the rate that applies after it expires (Correct answer)
- Whether the card is issued by a bank or credit union
- The minimum payment amount during the promotional period
Correct answer: The promotional period length and the rate that applies after it expires
The post-promotional interest rate and when it applies is the critical risk factor in balance transfer strategies.
Question 7: Which of the following is considered a 'non-recurring' debt that may be excluded from DTI calculations?
- A car lease with 18 months remaining
- A student loan in deferment
- A personal loan with 6 months remaining (Correct answer)
- Child support obligations
Correct answer: A personal loan with 6 months remaining
Debts with 10 or fewer months remaining are often excluded from DTI calculations under conventional guidelines.
CMPS Debt and Cash Flow Management 3
Which debt repayment strategy focuses on paying off the highest-interest debt first while making minimum payments on all others?