Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Reshaping Your Mortgage Strategy
Transcript
- Lucas: So the Fed just held rates steady at three point six five percent, and Chairman Warsh made it pretty clear he's not the easy-money type. The statement lost its cutting bias. That has big implications for anyone with a mortgage—or thinking about getting one. Luna: Yeah, I think a lot of people assumed we'd see a cut by mid-2026. That's looking less likely now. Lucas: Right. And if you look at the CPI data, May came in at 334.0, up from 332.41. Core CPI is at 336.1. Inflation is sticky. So the question is: should you still lock in a thirty-year fixed-rate mortgage, or does an adjustable-rate mortgage start to make sense again? Luna: That's a big shift. For years, the advice has been 'just get the fixed rate and forget it.' But if rates stay elevated and inflation doesn't cool, the ARM could save you thousands in the early years. Lucas: Exactly. Let's put numbers on it. The spread between a five-year ARM and a thirty-year fixed is roughly seventy basis points right now. On a $400,000 loan, that's about $2,800 a year in savings for the first five years. But the risk is that when the ARM resets, rates could be even higher. Luna: And that's where the inflation outlook matters. If you believe the Fed will eventually get inflation down to two percent, then the ARM makes sense because rates will fall by the time it resets. But if you think we're stuck at three or four percent, then the fixed rate is the safer bet. Lucas: There's a tool that helps answer that question: the ten-year breakeven inflation rate. Right now it's at two point two six percent. That's the market's expectation for average inflation over the next decade. It's actually down a bit from two point two nine a few days ago. Luna: So the bond market is saying inflation will be around two and a quarter percent. That's not super sticky. If you trust that, an ARM looks attractive. Lucas: But here's the catch: the ten-year breakeven has been notoriously wrong in recent years. It underestimated inflation in 2021 and 2022. And with core PCE still at 129.6—up from 129.32 last month—there's no clear sign we're sliding back to two percent. Luna: So you're saying the breakeven might be too optimistic. Then the fixed rate is the hedge. Lucas: Exactly. And if you're worried about inflation, you can pair a fixed-rate mortgage with Treasury Inflation-Protected Securities, or TIPS. They adjust with CPI, so your bond portfolio keeps up while your mortgage payment stays flat. That's a classic inflation hedge. Luna: I've been looking at TIPS yields. The real yield on ten-year TIPS is around one point eight percent. That's actually pretty attractive historically. Lucas: It is. So if you believe inflation stays above two percent, TIPS give you a real return plus inflation protection. Meanwhile your mortgage is a nominal liability. That's a nice asymmetry. Luna: Let's talk about the ARM reset risk more concretely. Say you take a five-year ARM at four point five percent. After five years it could adjust to something like five and a half or six. Can your budget handle that bump? Lucas: That's the key stress test. I'd recommend looking at the worst-case scenario: the ARM's lifetime cap, usually six percentage points above the initial rate. If your payment at the cap would break your budget, don't take the ARM. But if you have room, the savings now could be invested or used to pay down principal. Luna: And there's another angle: if you plan to move in five to seven years, the ARM is almost always better. The risk only crystallizes if you stay long enough for the rate to reset. Lucas: Right. So the decision really depends on your personal inflation outlook, your time horizon, and your risk tolerance. There's no one-size-fits-all. Luna: Speaking of personal finance decisions, I want to mention something about the show itself. We keep these episodes ad-free on purpose. No commercials, no sponsor interruptions. It's just us talking through the numbers. If you find that valuable, there's a way to support that choice. Lucas: Yeah, it's at buy me a coffee dot com slash fexingo. No pressure at all. But if our conversations have helped you think about a decision differently, that link helps keep the podcast exactly as it is. Luna: We don't run ads because we think the topic matters more than a thirty-second spot. So thanks to anyone who chips in. Lucas: Alright, back to mortgages. One more data point: the Fed's interest on reserve balances is at three point six five percent. That's the floor for short-term rates. As long as that's where it is, banks have no incentive to lend cheaply. Luna: So mortgage rates are unlikely to drop much unless the Fed cuts. And if inflation stays sticky, cuts are off the table. Lucas: Exactly. So the window for low fixed rates may have closed for a while. That doesn't mean you should panic into an ARM. But it does mean you should run the numbers yourself, with your own inflation assumption, not just whatever the pundits say. Luna: I'd add: look at the core PCE, not just CPI. Core PCE is the Fed's preferred gauge, and it's still creeping up. Until that trends down, the Fed stays on hold. Lucas: Good point. Core PCE is at 129.6, up from 129.32. That's a small month-over-month increase, but it's the direction that matters. And the effective federal funds rate is 3.63, essentially flat. No momentum toward easing. Luna: So for someone buying a home right now, what's your one piece of advice? Lucas: If you can afford the worst-case reset, take the ARM, invest the savings in TIPS or a diversified portfolio, and revisit the decision when the reset approaches. If that uncertainty keeps you up at night, pay a little more for the fixed rate and sleep well. Luna: I think that's the right framework. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We'll be back with more on inflation and your money.