The main premise of the argument is that by getting the loan to a Conforming Rate she will be able to save 1% on the loan.

“If she uses this 40k to bring down her loan to the confirming loan range and brings her rate from about 6% to 5%”

If this means getting it to below $546,250 in San Diego county from a Jumbo, then YES, 1% or more is likely correct.

However…

If this means she is trying to take the loan from $457,000 to $417,000… then the argument is NOT as valid as at $457 (up to $526.25k) one can do a “jumbo conforming” for what has recently been roughly 0.25% higher than the regular conforming loan. So a savings of only .25% is in question, and that may not be worth borrowing from the 401k for.