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To update Twilio phone calls in real-time with Node.js, developers can use the Twilio REST API to redirect existing calls to new TwiML URLs. This allows for dynamic updates during a call without rigid scripting. Setting up an Express server receives incoming calls and uses Twilio's Twiml to pause the call until it is asynchronously updated. To set up this functionality, developers need to install necessary libraries, create an Express app, configure their Twilio account, and use ngrok to make the app publicly accessible. Once the setup is complete, developers can update a live call by redirecting it to a new URL with updated TwiML or directly giving TwiML to update the call. This enables features like waiting room functionality and asynchronous tasks without leaving the phone call hanging.