I’m almost done paying my home, my wife wants to sell it and buy a bigger house using the money from the sale? Someone told me to borrow against the house instead of selling it, and then purchase a life insurance policy as a collateral. Is this smart?
It's very common to buy a house, and then sometime later sell this house and use the equity as a down payment on a bigger house. For example, you buy a house that costs $100,000. Over some period of time you pay off $30,000 of the mortgage, So you still owe $70,000 and you have $30,000 in equity. Then you sell this house and buy a bigger house that costs, say, $150,000, You use $30,000 equity from the first house as a down payment on the second house.
If you're lucky, the value of the house has gone up while you were living there, so while you bought it for $100,000 it's now worth say $120,000. As you still owe $70,000, your equity is $50,000, the $30,000 you paid off plus the $20,000 that the value increased.
It is certainly possible to not sell the first house but borrow against it to get the down payment for the new house. But then you owe money on the new mortgage, you still owe the old mortgage, plus you owe on the home equity loan. The advantage is that you now own two houses. The disadvantage is that you are now paying for two houses.
Do you have some plan what you will do with the old house? If it's just going to sit there empty, this would be a very foolish thing to do. You'd be paying for a substantial asset that you are not using.
If you can afford two mortgages and you have some reason to want two houses, could be realistic. Like if you want a regular home and a vacation home.
If you are thinking that you will rent out the old house and make income from it, okay, that's a viable plan. But being a landlord is a difficult business. I've seen some posts on this site and elsewhere where people seem to think that you just sit back and collect rent checks and it's like free money. No, it isn't. If you want to get into a discussion of the pros and cons of the landlord business, that's probably another question. Suffice it to say that it's a business that involves significant work and significant risk.
I don't see why you'd need a life insurance policy as collateral. I don't see why the bank would insist on any collateral besides the house itself. Mortgages are among the safest loans for a bank to make because if you don't pay it back, they can seize the house and sell it. The house is the collateral.
If you're borrowing more money than the combined value of the two houses, maybe the bank would insist on a life insurance policy as collateral. I've never had a bank ask me for such, but I don't know what country you're in or how much money you're talking about. In the US, most consumer loans are either secured by the value of the thing you're buying, like a house or a car or a boat, or they are "signature loans" secured only by the borrower's good faith and promise to pay. But maybe in some circumstances or in other countries they'd insist on some other collateral. Has a bank told you that you would need a life insurance policy as collateral, or is this just something you were told by a friend who doesn't necessarily know?
I have no idea what the life insurance thing is about. (See edit below.)
Keeping the old house only makes sense if you are going to use that house for something that is worth continuing to pay mortgage on it. The most common version of that is renting it out. However, if you do that you are starting a business, with all the hassles and risks that come with running a business, even if you pay some of the income to have someone else manage the property for you; see past answers about what's involved before jumping on that idea.
If you sell the place, you would pay off its mortgage, and use whatever is left to help fund buying the larger house. It would be a good idea to check that this will in fact be enough that you'll be able to afford the mortgage on the new place. Remember that while the price you can ask for your house has gone up over the years, so has the price of everything else on the market.
EDIT: It has been pointed out that a Whole Life policy (see other questions/answers about that) could have accumulated enough saved value that a bank might accept it as collateral. But that's up to the individual bank, and you'd have to have one of these accounts for many years to save up enough that this would make any significant difference in your borrowing ability. Buying it now does nothing for you.