Personally, I think you should consider either option #1 or option #3. Agree with the others that #2 (HELOC and pay off debts/upgrade house) would not necessarily be the wisest decision **unless you are incredibly disciplined about your finances.** We don’t know what caused your current debts (medical emergency, school debt, etc.), so we can’t really judge how well you manage your money.
Your second option would be wise ONLY IF you pay off debt with much higher interest rates AND if you cut your expenses rather drastically…hopefully, you could increase earnings/income, as well. By paying off ~15-20%+ credit card debt with a HELOC that is capped at a very low rate, you can deduct the interest paid on this loan, which you can’t do with credit card or most other consumer debt, and you can pay your debts faster, and dramatically lower your interest expenses.
Additionally, the lower rate will enable you to pay off your debts more quickly, and pay less in interest IF you stick to a very disciplined payoff plan.
As flu noted above, you first need to think hard about why you’re currently in debt, and be honest about your ability to get out of debt and stay out of debt. If you’re in any way inclined to pay off some debt, but then spend any “extra,” or if you think you’re likely to go further into consumer debt because your habits or spending/income don’t change, do not go with option #2.
Option #3 is tempting if you don’t have a family and would be willing to downsize or move to another, less expensive location. That’s certainly a viable option, IMHO.
If you had said that you don’t like the house and want to move to a different location or type of house, etc., I’d tell you to go with option #3, but rent instead of buy something else, as things are very bubble-like right now. If you could stay with family for a very long time (rent-free or low rent), then it would make that option even more compelling. But since you’ve said that you wouldn’t move if not for the equity, I’d have to agree with the other Piggs who say that you should stay put and work on clearing your debts and building up some more savings the hard way (increasing your income and/or cutting spending).
