How can I use a house I own free and clear to purchase another home? I want to buy another home using a house as collateral.
As pointed out in a comment, it would be more natural to get a regular mortgage on the second house, which is essentially using the second house as collateral for its own loan. If you are to use the first house, either mortgage it or get a home equity line of credit on it and use that money to buy the second house.
The relative merits of the options may depend in part on where you live, whether or not you live in the homes, and the relative cost of the two properties. For example, in the US, first and second homes get preferred tax treatment in addition to rates that are typically better than commercial loans (including mortgages for investment properties). If you're going to get a better rate and pay less taxes on one option and not on the others, that's definitely something to weigh.
How can I use a house I own free and clear to purchase another home?
Answer: walk in to any bank, that's any bank, or any lending institution.
State that you own a house free and clear.
This will happen:
They will throw money at you.
In all jurisdictions, it's incredibly easy to borrow large amounts of money at the lowest possible rate, once you own a house outright.
On top of that, you want to spend the money on another house (as opposed to a jet-ski), so you have even more equity. Winner!
Your main question will be this. Say your current house (owned outright!) is worth $500,000...
Go to a bank or lender, and say to them, "How much money will you give me to buy another house putting both the houses on the mortgage?"
One bank will say "Fantastic! Buy any house you want up to $400,000!" Another will say "$450,000!" another will say "$300,000!" In a hot market another will say "$650,000!". So shop around and see who will give you the most.