Then for the next round, separately consider the values of taking out a 401k loan. In that case, you'd be comparing the money saved by immediately paying off the mortgage with the money spent to finance the 401k loan.

I did this part, after realizing I was somewhat wrong (I think!) in my previous posts where I said there was essentially no advantage to the 401(k) loan. I forgot that the advantage is that the interest you pay on the 401(k) loan remains as part of your net worth, while the interest you pay on your mortgage vanishes into the ether. I think these numbers are pretty close to BDDD's, except I'm guessing at his payoff rate. In both cases, we first pay down the existing mortgage (using the $80k cash), leaving a $50k mortgage balance.

Case 1:

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- Don't touch the $50k in 401(k)

- Pay off remaining mortgage balance in 36 months from income stream

- At 4.62%, paying off that $50k is 36 payments of $1490.03, amounting to $53641 ($50k in principal and $3641 in interest).

Case 2:

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- Take $50k out of 401(k) at 4.5% and pay off mortgage.

- Pay off 401(k) loan in 36 months from income stream

- At 4.5%, paying off that $50k is 36 payments of $1487.35, amounting to $53545, all of which eventually is contributed to the 401(k)

Assuming 7% return (that's a number MMM uses, and we're at his site, so that seems appropriate), in Case 1 the 401(k) balance ends at $61252 after 3 years (started at $50k and made no contributions). In Case 2, it ends at $59556 (started at $0k and made $1487.35/mo contributions). If you also contributed the extra $2.68/mo you have left free in Case 2 due to the slight interest rate difference, you finish with $59663. So Case 1 wins by $1589.

But our OP seems to be much more pessimistic and risk-averse than MMM. So if we instead assume a 0% return over 3 years, Case 1 ends right where it started with $50000, while Case 2 ends with $53641. Then Case 2 wins by $3641 (that's the amount of the interest payments which otherwise would have gone to the bank).

The break-even point seems to come at about a 5% return, where both cases end with about $57880 in the 401(k).

The relatively small amount of interest payments on that balance+term means that the max tax savings due to the mortgage interest deduction would be about $300 over those 3 years, and only if he's already at or above the standard deduction. But it's still a slight push towards Case 1.

And I would still be concerned about Case 2 and the tax/penalties if I lost my job and had to repay the 401(k) loan in 60 days. All that adds up to say that for me, I'd wouldn't risk the 401(k) loan; if returns end up being above 5%, I've lost money doing it (especially since those returns continue to compound), and I'd lose more money if I lost my job. But your expected rate-of-return still means that different people can have different answers.