The 401K interest is paid back to yourself rather than to a bank. So no matter how it is calculated, the money is yours no matter what.

However, paying off a mortgage with a loan from your 401k is most certainly a bad idea. The interest on your mortgage is tax deductible. If your interest rate is 7%, in reality you're only paying around 5% after the tax advantage. On the other hand, the official interest on your 401k is irrelevant (because you pay it to yourself)... but the real cost of borrowing from your 401k is that your money is not earning the interest that it could be if invested.
You should be making between 8% and 11% average in your 401k if it's invested properly. (8% if you're nearing retirement, 11% if you're more than 10 years from retirement). So you'd be saving about 5% interest but it would be costing you 8-11% interest. That is a bad deal.

If you're not earning that kind of interest on average, or if you're not sure... do ask another question about what your 401k investments should be in. Give your age and expected retirement age in your question to get the best results.

Best of luck in your investment decisions!