Your home's equity is equal to the difference between its value, as determined by an appraisal, and the amount of your mortgage or mortgages that are still owed. If the value is less than what is owed, you are said to be "under water" meaning you owe more on your home than what it is currently worth.
You purchase a home valued at $150,000. Because you pay 10 percent as a down payment, you finance $135,000. Your payments are $1,000 per month. After five years of making payments, you owe only $75,000. Because you home is valued at twice what you still owe on your mortgage, the equity would be $75,000.
Having equity in your home is a good thing because it can provide you access to additional money you may need. For example, if you want to remodel your home, you can take out a home equity line of credit to cover those costs. The credit taps into the existing equity in your home. Usually, the credit amount available is at or below your home equity.
Keep in mind that home values do fluctuate. If the real estate market takes a down turn or if there happen to be many homes for sale in your neighborhood, your home's value could depreciate. That means if you're figuring your equity based on the original appraisal of your home then you might be surprised by how much is really available. The best way to get an answer is to have a new appraisal done on the property.
Because you are putting your home up as collateral when you take on this debt, you do risk losing your home if you default on the debt. Also, be sure the purpose for the debt is a smart one. You don't want to waste all of your equity because there may come a time when you need to use it for education expenses, medical costs or home repairs.