I write about mortgage rates every week, but recently, I’ve heard some sources chattering about what’s called the “real mortgage rate.” In a nutshell, this is the interest rate on mortgages minus the current inflation rate. “With inflation running so high right now, even though mortgage rates have risen, the real mortgage rate is a negative number,” says Kate Wood, home expert at NerdWallet. When the CPI was at 9.1%, for example, “if you had a mortgage with a 5% interest rate, your real mortgage rate is -4.1%,” she says. (See the lowest mortgage rates you can get here.)
It was Mischa Fisher, chief economist at Angi, who recently told us: This is the first time in 40 years that we’ve had negative real rates on mortgages. That means the inflation rate is greater than the interest rate — so as painful as a 5.5% mortgage is relative to a 2.9% mortgage, it’s still a better deal than parking money in cash. “Only 48 months in the last 51 years have had negative interest rates, so history suggests rates have to rise further or inflation has to drop,” says Fisher.
Basically, the real rate of interest, whether for mortgage or anything else, is the after-inflation rate you are paying. “[This} is a better measure of the true cost of the debt in terms of impact on buying power,” says Greg McBride, chief financial analyst at Bankrate. (See the lowest mortgage rates you can get here.)
To be sure, most pros we talked to said using the real mortgage rate wasn’t that helpful long term. “The real rate is best evaluated over an extended period rather than just at one point in time. After all, you’re going to make payments on that loan for up to 30 years,” says McBride. And Wood notes that even though the real mortgage rate is a negative number, you’re still paying your mortgage, and that this number isn’t widely and is “confusing” to borrowers.
While on the surface, a rate of 5% when inflation is 9% sounds like a steal. “But your 5% rate is fixed for 30 years and inflation won’t stay at 9% forever. What looks good today takes on a whole other meaning if inflation falls to, say 3%, in a couple of years,” says McBride. Of course, should that happen, you could refinance (just note that has a cost). And McBride notes that: “Over time, inflation has averaged around 2.5% and for homeowners that locked in sub-3% rates in 2020 or 2021, they also locked in a real rate that should run pretty close to 0% for the life of the loan,” says McBride.
So if you weren’t lucky enough to lock in those rates, what does this mean for you in terms of getting a mortgage now? “Looking at the real mortgage rates could shift your perception of what’s a good mortgage interest rate,” says Wood. But one thing homebuyers should keep in mind, according to LendingTree’s senior economist Jacob Channel, is that the bottom line comes down to this: The higher the APR that a buyer is offered, the more expensive their loan will be. “Homeowners should remember to look holistically at their mortgage, instead of just zeroing in on one or two of its features. An APR helps them do just that,” says Channel. (See the lowest mortgage rates you can get here.)