In more detail
Equity grows in two ways: as you repay the loan's principal and as the asset's value rises; it shrinks if the value falls. On a home it can be borrowed against with a home equity loan or a HELOC, usually up to a combined loan-to-value limit set by the lender, often around 80–85%. Equity only becomes cash when you sell or borrow, and selling costs reduce it. In business and investing, "equity" also means ownership shares in a company, or a company's assets minus its liabilities.
Why it matters
Equity is a cushion: with little of it, a drop in prices can leave you owing more than the home is worth, which makes selling or refinancing hard. Borrowing it back out turns ownership into new debt secured on the home.
Example
A home worth $350,000 with $220,000 left on the mortgage has $130,000 of equity, and an LTV of 62.86%. A lender allowing a combined 80% would let you borrow up to 0.80 × 350,000 − 220,000 = $60,000 more; at 85%, $77,500. If the home's value fell 10% to $315,000, equity would drop to $95,000.
Common confusion
Home equity is ownership in one asset; net worth is the total of all your assets minus all your debts.