Rate of Return calculation for early mortgage payoff

[Cliff Harrison]

Situation:

Single Family Rental financed on 15 year note.  P&I payment is $330 dollars.  13 years remaining on amortization schedule.  Payoff amount is $35,000.  Interest rate is 5.25%.  No plans to sell, assume a hold period of 20 years from present.  Tax bracket 33%.  25.5 years of depreciation expense remaining.

What is the ROI for paying the $35,000 to pay off the mortgage? Is it as simple as (5.25 - mortgage interest deduction) or is more complicated and involving an IRR calculation over the amortization period or even over the hold period? You will receive an additional income stream (additional cash flow) of $3960 annually for the 13 years up until the mortgage would be paid off through they normal amortization. However a portion of that money not being received as cash flow is going towards paying down the principal, and it remains with you as an asset (equity), so from a net worth perspective this portion of the cash flow is not an incremental return on investment. Do I need to plug in a return on the new cash flow (depending on what is done with it - spending, investment, etc) to calculate the true ROI? Is there a discount rate for the fact the additional cashflow is GUARANTEED with the simple act of paying off the mortgage with no additional assumptions? Interesting.

Thanks

Cliff