I would like your recommendation on whether you should buy a house with a mortgage, which you would pay as you go, or should you buy it in full.
If a person has a choice, it is probably better to pay cash. But not always.
If your large pile of cash can earn more being invested than cost of the interest to borrow a similar large pile of cash, it is beneficial to get a mortgage. Otherwise pay cash.
A house costs $100,000. I have $100,000 in extra money. I can invest that at 5% per year, and I can borrow an additional $100,000 at 2% per year. Since I can make more on my pile of cash than it costs to borrow another pile of cash, borrowing is better. Compound interest is the most powerful force on the planet according to Albert Einstein (maybe).
That isn't likely for most people though.
Here is the results from some online financial calculators.
http://www.calcxml.com/do/hom03 Borrowing $100,000 with 2% interest for 30 years will cost a total of $148.662. You get $100,000, but it cost you $48,662 to do it.
http://www.calcxml.com/do/sav07 Saving $100,000 in a bank account with an interest rate of %5 will be worth $432,194 in 30 years. By not spending the money you will earn $332,194 over the course of 30 years.
So if you can invest at 5% and borrow at 2% you will end up with $283,532 more than if you didn't.
It is a pretty extreme example, and financial advisers make a lot of money figuring out the complex nature of money to make situations like that possible.
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Besides all of the other answers, I will point out that many people simply don't have enough cash sitting around to buy a home outright. It would take many years (or even decades) for the average family to accumulate the necessary cash.
Also, while you are pinching your pennies for years in an attempt to save up for your dream house, remember that inflation is steadily driving up the cost of goods and services. A house that costs $200K today could cost $230K in 5 years due to inflation.
The advantage of using a mortgage is that you pay for a house at TODAY's price, using TOMORROW's money.
Your question suggests that you rightly observed that it was not a good idea around 2006 (the last peak in housing). That was when prices were at their maximum, and had nowhere to go but down. Some experts think that house prices STILL have further to go on the downside. Meanwhile, wages have been going nowhere during that time.
This phenomenon seems to happen about every 40 years or so, the 1930s, the 1970s, and around 2010.
At MOST other times, say the 1980s, houses are likely to go up for the "foreseeable" future. At those times, you want to buy the house at "today's" price, then pay for it in future dollars when you are earning more money.
The irony is that what most people observe as teenagers is usually the wrong thing to do when they are, say, forty. In 2035, it will probably make sense to have a large mortgage in a bull housing market. Whereas the people born in the early 1970s that got "caught" recently, observed the bull market of the 1980s and 1990s in THEIR teens and twenties.
Some countries, like the United States, allow a mortgage interest tax deduction. This means the interest you pay on a mortgage, which is typically much more than half of the monthly payment at the beginning of a 25 year mortgage, is tax deductible, so you might get 33% or more of the interest back, and that effectively makes the interest rate significantly lower. Therefore you are borrowing the money really cheap. That makes MrChrister's answer even more appropriate.
I believe the reason is because society and the economy is set up a certain way, and re-enforced by the government.
Your options are:
So, people usually go with the most attractive of their limited options, getting a mortgage. If you want to dig deeper, do some research as to why housing is expensive. Some things to consider: you need the government's permission to build houses, thus limiting the competition in the home building market, the housing bubble, artificially setting house prices, etc.)
To summarize: people need mortgages because houses are expensive, and houses are expensive for many reasons, big ones having to do with the government.
A $100K house and $100K are not equivalent assets.
Here's a hypothetical...
You and I both work for the same company, and both get a $100K bonus (yes, I said it's hypothetical).
You decide to use the $100K to pay off your house. I put the money in the bank. Six months later, our company lays both of us off.
I have $100K in the bank. I can last for quite a while with that much money in the bank. You have a house, but you can't get a mortgage or home equity loan, because you don't have a job. The only way you can access the money is by selling the house, which requires you to pay money to a real estate agent and perhaps taxes, and leaves you looking for a place to live.
That assumes there isn't something systemic going on - like the credit crash - and there is credit available for somebody else to buy your house.