My family is growing out of our current house and we have recently been checking our options;
Home info:
We originally paid 179.9k and we now owe 174k on the house (been in 2 1/2 yrs).
3 Bedroom, 2 bath. 2 beds on main floor, 1 non-egress in the basement.
The house is a 1952 renovated rancher with attached single car garage and 100% finished basement. 2000 sqft total, with 80% oak hardwood.

The house we want to upgrade to is in the 225k-260k range now.

Option 1: Sell the house in the range of 170-175k (base on realtor's market evaluation)
If we put the house on the market for 175k and sell it with the addition of the 7.5% closing costs, we will owe (175k-174k-(175k*0.075) or $12,125.
After selling my family would rent a 3 bedroom house or apartment for 6-12months and wait for the right house to purchase.


Option 2: Rent our house.
This would require a refi (if possible) which would improve our interest rate from 6.375% to 5.00%, reducing our monthly combined house payment to $1280 from $1416.
Having done my own sampling of the neighborhood, i believe we can rent the house for $1000-$1050 very easily.

Option 3: Stay in the house.
This is my least favorite option due the the fact that even if the economy somehow improves quicker than expected there is only so much i can expect to gain for a starter house will limited qualities. Also if we wait while things get worse, we'll be in a deeper hole.

Some other factors i'm considering;
a. if the market continues to drop and recovery is as slow as suspected renting the house would need to be for at least 5 yrs before any equity is available, which then will be hit by capital gains for 15% anyways.... that makes me lean to selling the house.


Any comments/advice on my situation would be much appreciated, i'm sure i've missed quite a few perspectives.