In calculating monthly mortgage payments for semi-annual compounding, what is the first step regarding the annual interest rate?

In the context of calculating monthly mortgage payments for loans with semi-annual compounding, the first step involving the annual interest rate is to convert the nominal interest rate (NOM%) to the effective interest rate (EFF%). This conversion is crucial because semi-annual compounding affects how interest accumulates over the period of the loan.

Using the effective interest rate instead of the nominal rate ensures that the monthly payments are calculated accurately based on the true cost of borrowing. The nominal rate does not take into account the frequency of compounding, which can lead to discrepancies in the actual interest that will accrue over time. By applying this conversion first, it establishes a correct basis for further calculations such as payment amounts and total interest paid, aligning the payment schedule with the actual compounding nature of the loan.

Steps like setting payment periods, entering the mortgage amount, or calculating the number of months come afterward and rely on having the right interest rate for accuracy in calculations. Therefore, changing the NOM% to EFF% is a foundational step that impacts the ensuing calculations for monthly mortgage payments.