I am working on a cash flow model for mortgage pricing and have a question on hybrid mortgages (the coupon is fixed for an initial period of time and than resets to a floating coupon). I do not have a background in mathematics, so those of you who do, please help!It is my understanding that the way to discount the payments for such a product would be to discount the fixed payment portion at a rate fixed till reset (via standard discounting procedure) and then to discount the floating portion at a float rate with the corresponding maturity for each time period.Is there a way to express this combination of rates as one “average" discount rate and discount all the payments at that rate?I need this ASAP so your inputs will be very helpful.

I'm not sure why you'd want to do this, and how you would discount the unknown floating payments.There is a fixed rate that is equivalent to the floating rate. It's called the swap rate.If you want to make this problem easier, assume you know the price at reset time, par to make it very simple. A floating rate instrument's price does not depend much on interest rates. Its price in the future is probably pretty close to what its price would be today. Then just pretend the mortgage is a balloon with payout when the fixed interest rate ends.

Thank you Aaron! This is exactly how I am doing it right now - assuming balloon at reset. The reason why I need to do this is that I am up against a system limitation. It was designed to handle fixed rate loans and can only take one discount rate. I was thinking that by using sort of a "blended rate" for hybrid loans will improve the accuracy of my results, as I am seeing a lot of hybrids (commercial and multifamily loans) that after reset become fixed again (for another 3-5 years). This is going to be a temporary solution.What I am looking for is a formula that is going to give me one blended rate given rates in different periods and the length of each period. Do you know if such a formula exists?