Will Rising Mortgage Rates Cause More Buyers to Purchase a Home in Cash?

Mortgage rates have been on the rise all year. And that's making cash purchases more tempting.

Mortgage rates have been rising since the start of the year. And in March, rates have been climbing sharply.

At this point, it's fair to assume that mortgage rates will keep going up. The Fed has plans to implement a series of rate hikes this year. And that could easily lead to higher rates.

Of course, these mortgage rate increases are coming at a time when housing inventory is at a low. And as it is, cash buyers have an advantage over buyers needing financing to complete a home purchase. It therefore begs the question: Will rising mortgage rates lead to an uptick in cash transactions.

Here's a summary of mortgage rates for March 30:

Data source: The Ascent's national mortgage interest rate tracking.

30-year mortgage rates

The average 30-year mortgage rate today is 4.822%, up from 4.787% yesterday. At the current pace, the 30-year loan could easily top 5% by April.

20-year mortgage rates

The average 20-year mortgage rate today is 4.537%, up from 4.507% yesterday. At this pace, it won't be surprising to see the 20-year loan hit 5% this year.

15-year mortgage rates

The average 15-year mortgage rate today is 3.937%, up from 3.884% yesterday. We could see the 15-year loan reach 4% by April at this pace.

5/1 ARMs

The average 5/1 ARM rate is 3.688%, up from 3.628% yesterday. There's clear savings to be reaped with a 5/1 ARM compared to a 30-year loan. But in time, the rate on a 5/1 ARM can climb, making a mortgage more expensive.

Will cash offers dominate?

In today's market, making a cash offer on a home is easier said than done. That's because home prices are very inflated, so paying all cash means having to come up with more cash.

Given where mortgage rates are sitting, though, it wouldn't be surprising to see more buyers making cash offers. And also, real estate investors who buy homes as income properties may be more inclined to purchase homes with cash if they have it.

Is that a good idea? It depends. Paying cash for a home means avoiding mortgage interest, and it also increases the likelihood of getting an offer accepted. On the flip side, it means tying up a lot of money in a fairly illiquid asset. That's a risk everyday buyers may not be in a position to take, and the same may hold true for investors as well.

All told, mortgage rates aren't so high that financing a home no longer makes sense. And while rising rates might lead to an uptick in cash offers, that doesn't mean borrowing activity will completely drop off. Besides, many buyers aren't in a position to buy a home outright. Those needing financing options will have to shop around with different mortgage lenders in the hopes of snagging a relatively competitive rate on a home loan.