The equity, or established ownership stake, in a residential real estate unit (home) that is typically used as a basis (collateral) for loans. A borrower, by means of a home equity, has to have a certain amount of home equity legally established as a pre-condition it to secure a loan. Most lenders set a condition that a borrower can qualify for loan if his/ her stake in the total value of a home is not less than a minimum percentage (e.g., 20%, 30%, etc.)

Lenders usually evaluate the market value of a borrower’s home as part of the application process (for which the borrower covers the fees).

Home equity can be used as collateral in home equity lines of credit (HELOCs) which give a homeowner-borrower a revolving line of credit to finance unusual expenses or to refinance debt on other loans such as short-term loans, credit cards, etc. This line of credit is a second mortgage that allows a homeowner to obtain financing from the market based on the value of home equity.

Home equity can also be used as collateral in a home equity loan, where a homeowner borrower can secure a lump sum of money against his/ her home’s existing equity. However, a home equity line of credit (HELOC) can leverage home equity but in the form of an open line of credit. The homeowner can borrow up to a pre-determined amount as needed.