The interaction between iron released from corroded steel canisters and bentonite is a key process influencing the long-term performance of nuclear waste repositories. In particular, the migration of Fe²⁺ into montmorillonite (Mnt) interlayers may alter its hydration, swelling, and ion-transport properties. In the present study, molecular dynamics simulations were performed to investigate the hydration behavior, structural response, and transport properties of Fe-exchanged montmorillonite (Fe-Mnt) under varying hydration states. The simulations focus on short- to intermediate-time-scale Fe2+ and Fe3+ interlayer exchange and hydration effects, and do not consider long-term structural substitution, Fe-bearing clay phase stabilization, or secondary iron mineral precipitation. Systems containing Na+-, Fe2+-, and Fe3+-Mnt were examined using both periodic and edge-exposed configurations to evaluate interlayer structure, ion exchange, and free energy of Fe intercalation. The results show that Fe ions influence the interlayer spacing primarily at low water contents (<1 bilayer), where Fe-Mnt exhibits a d-spacing 1–2 Å larger than Na-Mnt due to stronger hydration. The calculated hydration energies follow the order Fe2+<Fe3+<Na+. Both water and ion diffusion coefficients decrease upon Fe ion intercalation, with Fe2+ ions diffusing an order of magnitude more slowly than those of Na+. Free energy profiles further confirm that Fe2+ and Fe3+ ions are thermodynamically favored in the interlayer, with Fe3+ being the most stable. These findings provide molecular-scale insights into the mechanisms of Fe–Na exchange and their implications for bentonite alteration in repository environments.