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All that you say sounds logical. The 5.12% cost after taxes of your mortgage is less than 5.5% you can get on AAA tax free bonds. The only reason I can see to pay off the mortgage would be if you have a cash flow problem. Apart from that, if you can take in 5.5% with one hand and pay out 5.12% with the other, it is to your advantage to keep the mortgage.
State tax is a minor reason to keep the mortgage.
Keep foolin! Chris
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