It's hard to comment fully without knowing your age and other circumstances. One strategy that might take some of the sting out of the tax bite would be this:
1. After you leave the job in 2006, transfer the 401k to traditional IRA.
2. Each year, convert enough $$ from the traditional IRA to a Roth IRA without bumping yourself up into the next tax bracket. You'll have to pay tax on the conversion amount, but hopefully at a lower rate than if you took all the money out in a big chunk later.
3. When you are ready to pay off the house, you can withdraw money from the Roth IRA without penalty, as long as you limit the withdrawal to prior contributions and conversions only. The IRS considers Roth money to be withdrawn in the following order:
-- contributions first
-- conversions next
-- earnings last
Leave the earnings and any of your prior contributions in the Roth. The conversions can be withdrawn tax-free at this point because you've all ready paid the taxes due when you did the conversions piece-meal in prior years.
Keeping good records of the transactions related to the Roth is a must.
This will spread the pain of the taxes due over a period of years and allow the earnings (and any previous contributions) in the Roth to compound and grow tax free.
If you will be less than 59 1/2 years old at the time you make the withdrawals from the traditional IRA to pay off the house, you'll have to factor in a 10% penalty on the amount you withdraw from the traditional IRA PLUS the regular income tax you'll owe on it.