The existing compensation methods for nonlinearity in heterodyne interferometers tend to be time-consuming, which limits their application in real time. To solve this problem, a real-time compensation method is proposed. First, dual-channel quadrature demodulation is used to transform the error signals in interference signals into the traditional three errors (direct current offsets, unequal amplitude errors, and phase nonorthogonal errors) in the demodulated signals. Second, the three errors are dynamically corrected by a simple algorithm based on the extremums extracted from the demodulated signals. To verify the effectiveness of the proposed method, experiments employing the proposed method were carried out to process simulated signals and to conduct actual displacement measurements. The results demonstrate that the nonlinearity in the heterodyne interferometer can be reduced down to a subnanometer level.