Definitely a mistake to sell based on the limited info provided. You have 600K equity, a paltry 400K mortgage by CV standards and dual income. What’s the problem? Since neither of you were laid off in 08/09, chances are your employment is reasonably secure. If you still have legitimate job security concerns, consider selling and renting.

If your original loan was large saddling you with high payments, consider refinancing to a 30 yr loan taking advantage of the historical low rates. You can still target paying the loan off in 15-20 yrs by making extra payments, while reserving the option to make the lower 30 yr amortized payment. However, if your current PITI can be covered by rent, I probably wouldn’t do anything. Worst case scenario you both lose your jobs, rent your house out and move the family to a small apt.

Regarding the 1300 sf house, it’s definitely too small for a growing family of four. Maybe ok if you’re a few yrs removed from dorm life and use to a minimalist lifestyle with milk crates for furniture. Realistically, it’s just a glorified apt with small 10’x10’ bedrooms, combo lr/dr/fr and a tiny kitchen. If your children are young, you will become increasingly miserable as your entire house morphs into a mold injection junkyard.