For another $200 - $350, you can outfit the old MTB for bombproof touring. I know there are bikes out there that are new and pretty, but for under $500 total investment, I don't think you can get a better bike. Those better quality old MTB's are excellent machines.
If you want to save money and DIY, I'd probably recommending going this route. Most mtn bikes with triple chainrings come equipped with decent touring gearing already and 26" wheels are sturdy and easily replacable. Make sure you get a drivetrain with nice low gears for those times you have to crank all that touring gear up those hills. A granny gear of a 24/26 tooth chainring on the front with a 34 on the back will give you sufficient gear inches for crawling up those hills.
I ended up finding a good deal on a lightly used Surly Long Haul Trucker off of craiglist last year and the bike is amazing for loaded touring, grocery shopping, or longer road rides. I can vouch that the LHT is a solid machine, and it's rock solid stability allows for carrying larger loads over long distances in comfort. So if you want to spend a little more money and get a nice touring bike with lots of good stock parts, you can't go wrong with the Surly. However, I think it'd be fun (and a bit more satisfying) to build up a custom mtn bike tourer for less.