CMPS Homeowner Cash Flow Scenarios 2 — Questions and Answers
Question 1: A homeowner refinances from a 6.5% 30-year mortgage to a 5.0% 30-year mortgage on a $300,000 balance. The monthly payment drops by $290. Closing costs total $5,800. What is the break-even period?
- 10 months
- 20 months (Correct answer)
- 30 months
- 40 months
Correct answer: 20 months
Break-even = $5,800 / $290 = 20 months.
Question 2: A homeowner with a $2,500 monthly gross income has a $900 mortgage payment, $200 car payment, and $150 student loan. What is their back-end DTI ratio?
- 36%
- 40%
- 50%
- 52% (Correct answer)
Correct answer: 52%
Total monthly debt ($900+$200+$150=$1,250) divided by $2,500 gross income = 50%; back-end DTI is 50%.
Question 3: Which cash flow strategy best helps a homeowner reduce their effective mortgage interest cost without refinancing?
- Switching to biweekly payments (Correct answer)
- Extending the loan term
- Taking a cash-out refinance
- Converting to an interest-only loan
Correct answer: Switching to biweekly payments
Biweekly payments result in one extra full payment per year, reducing principal faster and total interest paid.
Question 4: A homeowner has $50,000 in home equity and is considering a HELOC at 7.5% vs. paying off a credit card at 22%. From a cash flow perspective, which action maximizes benefit?
- Pay off the credit card using the HELOC (Correct answer)
- Keep the credit card and invest the $50,000
- Refinance the primary mortgage instead
- Do nothing and continue minimum payments
Correct answer: Pay off the credit card using the HELOC
Using a 7.5% HELOC to eliminate 22% credit card debt produces a 14.5% net interest rate reduction, directly improving cash flow.
Question 5: A homeowner's net operating income from a rental property decreases by $400/month due to a vacancy. How does this affect their mortgage planning cash flow analysis?
- It increases their available cash flow for debt service
- It reduces qualifying rental income used in DTI calculations (Correct answer)
- It has no effect on their primary residence cash flow
- It triggers automatic loan modification
Correct answer: It reduces qualifying rental income used in DTI calculations
Reduced rental income lowers the qualifying income used by lenders in DTI calculations, potentially limiting refinance or new loan eligibility.
Question 6: A homeowner converts their 30-year mortgage to a 15-year mortgage. Their payment increases by $600/month but they save $120,000 in interest over the life of the loan. What concept best describes this trade-off?
- Negative amortization
- Opportunity cost vs. guaranteed return (Correct answer)
- Loan-to-value rebalancing
- Equity stripping
Correct answer: Opportunity cost vs. guaranteed return
The $600/month extra payment represents an opportunity cost versus investing, while the $120,000 savings is a guaranteed return — this is the classic opportunity cost trade-off.
Question 7: A homeowner's ARM rate adjusts from 4% to 7% on a $250,000 balance. Approximately how much does their monthly payment increase?
- $350
- $480
- $625 (Correct answer)
- $780
Correct answer: $625
A 3% rate increase on $250,000 results in roughly $625/month higher payment, based on standard amortization calculations.
CMPS Homeowner Cash Flow Scenarios 2
A homeowner refinances from a 6.5% 30-year mortgage to a 5.0% 30-year mortgage on a $300,000 balance.
The monthly payment drops by $290.
Closing costs total $5,800.
What is the break-even period?