Whatever you take out of the 401k would count as ordinary income and taxed that way. You are required to take money out of the 401k in the next 7 years anyway, and, assuming that your regular income is pretty steady, you'd minimize your tax impact by taking out 1/7th each year. Is that >$200K + tax (roughly $308K total)? If so, then definitely go the 401k route because you'll need to do it anyway.

If not, then you really just need to calculate the costs in either scenario. The mortgage is likely to be a very reasonable option unless the 401K balance is very high.