As recently as 2017, tax laws gave you a clear incentive to dip into your home’s equity to reduce high-interest credit card debt, pay for a family vacation or make home repairs and improvements. Many people took advantage of it.
Under the Tax Cuts and Jobs Act of 2017 (TCJA), interest charges from home equity loans and HELOCs may no longer be tax-deductible.
The tax law changes make top-tier rewards credit cards an enticing alternative to home equity loans or HELOCs — depending on how you plan to spend the money. If you qualify for a 0% introductory interest rate for 12 to 18 months or more, you may be able to consolidate high-interest debt, pay for that dream vacation or remodel your home with no closing costs or added fees — and earn cash back, too.
Understanding how the TCJA may affect your home equity loan plans
In prior years, homeowners could take out a home equity loan or HELOC and deduct the entire amount of interest paid on the loan, the same way they deduct mortgage interest. Under the TCJA, taxpayers can still deduct interest on up to $750,000 of their mortgage debt for a first and/or second home.
But if you refinance your home, the new interest payments may not be tax-deductible. Under the TCJA, interest on a home equity loan or a HELOC, or a cash-out refinance, is tax deductible only if you are using the funds to substantially repair, remodel or improve that home.
In short: Tapping into home equity may no longer be one of the best solutions for debt consolidation or other expenses, because you’ll lose your mortgage interest deduction.
What’s left for homeowners looking for cash to spend as they wish? Options include:
Personal loans, which have no tax benefits, rewards or perks but may have high interest rates
Rewards credit cards, especially those with a 0% introductory offer on purchases or balance transfers
Fortunately, top credit card providers like Capital One, Discover and Chase have excellent rewards programs that can help you make the purchases you want without losing your mortgage interest tax deduction.
Before you apply, make sure to check your FICO credit score and review your credit reports with all three major credit bureaus. Fix any mistakes you may find on your credit reports to ensure you’re getting the best interest rate possible on these top-ranked rewards credit cards.
Best credit cards for a balance transfer
If you are looking to consolidate high-interest credit card debt, consider a credit card with a good introductory balance transfer offer. Make sure to calculate the balance transfer fees and weigh that against the available rewards and length of the introductory offer to choose the best balance transfer credit card for you.
Capital One® Quicksilver® Cash Rewards Credit Card
Capital One recently extended the 0% introductory APR on purchases and balance transfers on the Quicksilver cash rewards card to 15 months, giving you plenty of time to make a dent in your debt. The variable APR after the first 15 months can range from 16.24% to 26.24%. Keep in mind, there is a balance transfer fee of 3%.
The Capital One Quicksilver Cash Rewards Credit Card offers 1.5% cash back on every purchase, and a sign-up bonus of $150 if you spend $500 in the first three months. To use this card strategically, transfer no more than $5,000 of existing debt to this card, spend $500 in the first three months, and your sign-up bonus will cover your balance transfer fee.
You’ll need a credit score of at least 670 to qualify, and the better your credit, the higher your credit limit and lower your interest rate will be. There is no annual fee for this card.
Discover it® Balance Transfer
If you need extended time to pay down your debt, one option to consider is the Discover it Balance Transfer. Offering an intro APR of 0% on balance transfers for 18 months (and 6 months for purchases), this card also has a 3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*. After the introductory period, the variable APR ranges from 14.24% to 25.24%
There is no annual fee. Also, Discover matches your cash back rewards dollar for dollar at the end of your first year. Remember, balance transfers do not earn rewards.
To get the most out of this card after your introductory APR expires, pay attention to Discover’s cashback calendar to earn 5% cash back in rotating categories throughout the year, up to $1,500 in purchases each quarter, after activation. You’ll also get 1% on everything else, making Discover it Balance Transfer a good card to hold onto.
Wells Fargo Platinum Visa card
If you’re serious about getting out of debt, the Wells Fargo Platinum Visa card can help you with financial planning tools. Use the My Money Map budget and spending-management system to track where your money goes and to ensure you make large enough payments to pay off your qualifying balance transfer and purchases before the 18-month introductory 0% APR expires. The variable APR after the introductory period expires ranges from 13.74%-27.24%, so this is not an ideal card to carry a balance.
If you’re going to transfer a balance from a higher interest credit card, make sure to do it within the first 120 days, when the balance transfer fee is 3% ($5 minimum); after that, it rises to 5% ($5 minimum).
If you are looking to get your finances under control, the Wells Fargo Platinum Visa can help you do it. There is no annual fee and some handy perks, such as cellphone coverage and free access to your FICO score to help you manage your credit.
Best credit cards for a vacation
It is probably not the best idea to rack up debt to take a vacation, but we all need a break sometimes. If you have a financial plan in place and know you can pay off your credit cards promptly, choosing one of these travel rewards credit cards can help you pay for your vacation — and earn points for your next trip.
Capital One® Venture® Rewards Credit Card
With no annual fee for the first year ($95 after that) and 2x miles on every purchase, the Capital One Venture Rewards Credit Card is one of the best travel rewards credit cards available. The rewards don’t stop there. You’ll accrue 10x miles on eligible hotels.com/venture purchases through January 2020.
When you spend $3,000 on purchases within the first three months of opening your account, you’ll get a one-time bonus of 50,000 miles — worth $500 in travel. So go ahead and book that vacation… and the next one. There are never any blackout dates, and you can use your miles to fly any airline and stay at any hotel. Plus, there are no foreign transaction fees.
Be aware that the card has a variable APR of 17.99% to 25.24% and you’ll need a credit score of 670 or above to qualify.
Discover it® Miles
With no annual fee and a 0% introductory APR for 14 months on purchases (10.99% on balance transfers) Discover it Miles is the perfect card to plan a summer getaway. (A variable APR of 14.24% – 25.24% applies after the intro APR period.) Pay it back over time with no interest charges plus earn rewards.
How many rewards? Collect 1.5x miles for every $1 spent. At the end of your first year of card ownership, Discover will also match those rewards.
The card requires a credit score of 670 or above to qualify.
Best credit cards for home remodeling
You can still deduct the interest on your home equity loan, HELOC or cash-out refinance if you’re using the money to pay for home renovations.
But what if you are just ready for a change and want to purchase new furniture and home décor? You can’t use your home equity loan to cover those expenses and still deduct the interest.
Likewise, you may not be able to deduct the interest if you use your home equity loan to pay for certain aspects of a home remodeling — such as a hotel stay if your home is uninhabitable or dinners out because your kitchen is being remodeled.
Consider one of these rewards credit cards before you begin your next home improvement project.
Chase Freedom Unlimited®
Like the Capital One Quicksilver cash rewards card, Chase Freedom Unlimited is a great choice for a balance transfer or a home improvement project.
Chase Freedom Unlimited offers an introductory APR of 0% on purchases or balance transfers for 15 months, and a 17.24% to 25.99% variable APR after that. Keep in mind, balance transfers carry a fee of 3% or $5, whichever is greater.
Chase gives new Freedom Unlimited cardholders 3% cash back on all purchases in your first year up to $20,000 spent. You then earn 1.5% cash back on every purchase, every day. There’s never an annual fee.
If you really want to save on your next home improvement project, you can shop through the Chase Ultimate Rewards® portal to earn bonus points on purchases from major retailers.
If you plan to start your remodeling project in April through June, consider another version of this card: Chase Freedom® gives you 5% cash back on up to $1,500 in purchases from home improvement stores and grocery stores during those months, plus 1% in all other categories.
Bank of America® Cash Rewards credit card
The Bank of America Cash Rewards credit card lets you choose one of six categories for 3% cash back rewards, and the most relevant category for home remodelers is home improvement/furnishings. Qualifying purchases include building materials, lumber, glass, paint and general contractor services. Check the Bank of America website to see all categories and qualifying merchants.
In addition to 3% cash back in the choice category, you’ll earn 2% cash back at grocery stores and wholesale clubs on the first $2,500 in combined purchases per quarter.
Also, the card’s 0% intro APR period for purchases and balance transfers is 12 billing cycles with a variable APR of 16.24% – 26.24% afterward. Balance transfers must be completed within the first 60 days to qualify for the intro rate.
Capital One® SavorOne® Cash Rewards Credit Card
Think of the Capital One SavorOne as a specialty card for kitchen remodels. If your new kitchen is going to be under construction for a week or more, why not have a credit card that offers an excellent rewards rate for dining out?
The card provides 3% cash back on dining and entertainment, making it handy for times when your kitchen is out of order. You’ll also earn 2% at grocery stores to restock that new fridge, and 1% on all other purchases.
A flexible card with generous rewards, the Capital One SavorOne also has a 0% intro APR on purchases and balance transfers for the first 15 months. You’ll pay 16.24% to 26.24% (variable), depending on your credit, after that.
Best of all, get a one-time cash bonus of $150 after you spend $500 within the first three months, and pay no annual fee — ever.
Choose the right rewards credit cards to save
Under the new tax laws, home equity loans may no longer be the best way to consolidate debt or pay for certain purchases. But choosing the right credit cards can help you manage your finances, save money and earn rewards.