What is your need for lodging? A place to lay your head? Plenty of places to camp locally. A place for your family to roam while you are off playing? Then that is a horse of a different color.
Hard to make the call without knowing your budget, but if you have friends to share the cost with, I am a fan of using VRBO.com if looking for a nice place for the family to hole up at. Little vacation cabins are everywhere up there. If you want to be close to Mt. Hood but can't afford a cabin, google up Thunderbird in Government Camp. They have accomadations that may fit your budget.
If you are thinking of driving from Sandy, I'd like to re direct you to the Vagabond Lodge in Hood River. It's about 50 minutes to Timberline Lodge, especially that time of year as roads are clear. I have stayed there a few times while scouting out places to live in the local area, I really liked it. My in laws (who can be picky) stay there when they come visit. Reasonably priced, good location, and it's Hood River.. hard to go wrong.
Hwy 26 from Sandy/PDX can be a zoo where Hwy 35 from the Hood is generally clear sailing so the few miles saved by being in Sandy is easily lost by yahoos out for their Sunday drive.. and Hood River is wicked better for kicking around town, soaking in the ambiance if the place is for your family.
If it's just you, camp on federal/state land for free..sorta silly not to.