The balance owing (at Pmt #60 in green) to the lender after 5 years is $94,852.89 using 5.95% for year one and 7.15% for the next four years. One might be tempted now to just guess at a new rate until the balance after 60 payments is the same ($94,852.89), and that would be the blended rate. It would be nice if it was that simple, but it is not.

Lenders reinvest your monthly payment each month (deemed reinvestment) in order to achieve the yield on your mortgage. For example a mortgage at a nominal rate (nominal rates are also called annual interest rates, AIR) of 12% using semi-annual compounding actually gives the lender a 12.36% effective interest rate (EIR). For every nominal rate quoted there is a corresponding effective interest rate due to the type of compounding chosen. If the nominal rate is annually compounded then the effective interest rate is equal to the nominal rate, thus a yearly basis is always implied when one speaks of an effective interest rate. A mathematical “trick” that works only for mortgages that have semi-annual compounding allows one to quickly figure out an EIR from an AIR is to divide the nominal rate by two, shift the decimal place two places to the left, square the result, shift the decimal place two places to the left again and add it to the initial nominal rate;

AIR=12% EIR=12.36%

12.0/2 =6 6×6=36 .36

12.0 +.36 = 12.36%

One of the unique features of MORTGAGE2 PRO and MORTGAGE2 PRO PRO is the ability to to perform a present value /future value calculation on a cash flow and show what it accumulates to in the future. This is exactly what the lender does. Thus put all of the 60 payments equal to zero and the cash flow of $636.84 to the lender will accumulate to $140,443.98 if the lender reinvests the payment received each month.