Home News ‘The real mortgage rate is a negative number.’ As inflation stubbornly sits at a 40-year high, do current mortgage rates look better than they seem?

‘The real mortgage rate is a negative number.’ As inflation stubbornly sits at a 40-year high, do current mortgage rates look better than they seem?

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What is the so-called “real mortgage rate” and does it matter?

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I write about mortgage rates every week, and lately there have been several sources talking about “real mortgage rates.” Simply put, this is the mortgage interest rate minus the current rate of inflation. “Mortgage rates are rising because inflation is so high, but real mortgage rates are negative,” said Kate Wood, housing expert at NerdWallet. If you have a mortgage with an interest rate of 5%, the real mortgage interest rate will be -4.1%.” (See the lowest mortgage rates you can get here.)

Angi Chief Economist Mischa Fisher recently said: This means that inflation is higher than interest rates. So a 5.5% mortgage is a pain compared to his 2.9% mortgage, but it’s still a better deal than keeping cash on hand. “There have been only 48 months of negative interest rates in the last 51 years, and history suggests we need to raise interest rates further or lower inflation,” says Fisher.

Essentially, the real interest rate is the post-inflation rate you’re paying, whether it’s a mortgage or anything else. “[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.)

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