This is a no brainer to me. Buying the 400K house is lifestyle inflation. I'd get a smaller house and minimize my living expenses for the most expensive item people spend money on: housing. You say you want to save more, but you are considering increasing your housing expense. How is that going to help you save more?
Your current house will make a great rental, as far as monthly cash flow. I'd downsize and rent the house out, but no way I'd buy an even bigger, fancier house. I've played that game, but I played it with an eye to a long term investment and eventually turning it into a rental. But right now, with the market slowing I wouldn't make an equity play again, in fact, I'm looking at houses with MIL apartments close to commuting routes, transit, and in walkable neighborhoods. Yes, there is some grime dealing with city living that is walkable, near transit, etc., but it reduces my cost of living drastically while also being an income producing property at the same time.
That said, buying the bigger house will probably work out fine in 15 years, which is the horizon you gave, but you will see greater benefit and flexibility during that time, by downsizing and not increasing your lifestyle. I've experienced lifestyle inflation like crazy as far as housing, but I knew it was only going to be temporary, and was being purchased with an eye to investment. Having made 58k off the purchase in 16 months, about 95% of my investment amount, it was a good play. But it could have gone the other way as well, and when things go the other way, the economy sours, etc. it's better to have a cheap place to live so you can ride it out during hard times, rather than be sitting on a million bucks in real estate you cannot afford, cannot find renters for, and cannot sell....
