Join Date: Jun 2011
Location: Colorado Springs
You are getting some very good advice here on both sides of the issue. My recommendation would be to rebuild what you have.
In addition to making sure everything behind the engine is up to the task, also consider you're going to have fitment issues. Does the new engine have a threaded hole in the block for clutch Z-bar? If not, sure, there are ways around that. But this is just one little example of many issues with such a crate motor swap. You won't know you have them until you get there.
As someone told you, it's difficult to put 500 HP to the ground in a vintage Mustang. Yeah, people do it, but the reality is they simply melt the rear tires. That's a lot of money to just make tire smoke. And a well built 289 can certainly do burnouts.
If you rebuild your 289 with good compression, a good dual exhaust and a good cam, it will be a very fun street engine. If you add aluminum heads, it will be a pretty potent street engine; more than enough power. Small block Fords are a LOT of fun when you give them a LOT of cam. Since you have a manual trans, you're already way ahead of the game for a custom, snotty cam (within reason).
It's your car, your budget and your decision. Someone here made a very good point about cost. Buying the engine is just the beginning of what will be a long and costly shopping list. If you expect this and are prepared for it, cool. Unfortunately, a lot of people have grandiose visions which never become reality due to cost and complexity. My take is it's more fun to cruise to Dairy Queen in a nice Mustang with a warmed-over small block than spending years staring at a bunch of expensive parts in the garage.
Whatever you decide to do, have fun!