Methylenetetrahydrofolate dehydrogenase/cyclohydrolase (MTHFD2) is a new drug target that is expressed in cancer cells but not in normal adult cells, which provides an Achilles heel to selectively kill cancer cells. Despite the availability of crystal structures of MTHFD2 in the inhibitor- and cofactor-bound forms, key information is missing due to technical limitations, including (a) the location of absolutely required Mg2+ ion, and (b) the substrate-bound form of MTHFD2. Using computational modeling and simulations, we propose that two magnesium ions are present at the active site whereby (i) Arg233, Asp225, and two water molecules coordinate [Formula: see text], while [Formula: see text] together with Arg233 stabilize the inorganic phosphate (Pi); (ii) Asp168 and three water molecules coordinate [Formula: see text], and [Formula: see text] further stabilizes Pi by forming a hydrogen bond with two oxygens of Pi; (iii) Arg201 directly coordinates the Pi; and (iv) through three water-mediated interactions, Asp168 contributes to the positioning and stabilization of [Formula: see text], [Formula: see text] and Pi. Our computational study at the empirical valence bond level allowed us also to elucidate the detailed reaction mechanisms. We found that the dehydrogenase activity features a proton-coupled electron transfer with charge redistribution connected to the reorganization of the surrounding water molecules which further facilitates the subsequent cyclohydrolase activity. The cyclohydrolase activity then drives the hydration of the imidazoline ring and the ring opening in a concerted way. Furthermore, we have uncovered that two key residues, Ser197/Arg233, are important factors in determining the cofactor (NADP+/NAD+) preference of the dehydrogenase activity. Our work sheds new light on the structural and kinetic framework of MTHFD2, which will be helpful to design small molecule inhibitors that can be used for cancer treatment.