No. of Recommendations: 6
First, I assume the 10% loan was taken to get a conventional 80% 30 year mortgage and avoid having to pay PMI (mortgage insurance). This precludes the option of getting a 90% 30 year mortgage at the lower interest rate.

Now, let's think about the numbers. First, neglecting taxes it can be shown that you are better off paying the loan off early if your expected rate of return on the investments is less than the interest rate of the loan. Therefore, you would be better off paying off the loan unless you can expect investment returns of better than 11% over the course of the 15 year loan.

But, how is this affected by taxes? If the tax savings are used to pay-off the mortgage, it effectively reduces the mortgage interest rate. The effective after tax-savings interest rate is:

i_eff = i * (1-r)

where i is is the mortgage interest rate and r is the tax rate for your tax bracket. Therefore, if you are in the 28% tax bracket then:

i_eff = 0.11 * (1-0.28) = 0.0792

This means that you should pay off the loan early unless you can expect to get better than a 7.92% (after taxes) return on your investments. Assuming a long-term capital gain tax rate of 20%, that would mean your investments would need to return at least 9.9% before taxes.
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