Please do not construe this as advice, but, after reading your post, my thoughts are, as flu mentioned, that Option #2 is definitely a bad choice for many many reasons, and may end badly.
If you choose Option #3, and sell your home, you need to ask yourself where you are going to live, and how much that will cost you versus your current situation.
At your entry price point, you are going to have a difficult time finding something as reasonably priced–if you plan to stay in San Diego–and you may actually end up spending more for housing than you are now.
This brings us to Option #1. If you plan to stay in San Diego–and this is key–it seems your current housing expense is quite reasonable for the area. Unless you really want to downsize, imo, you’re going to have a hard time finding a less expensive place to live–even if you rent. If you choose Option #1, perhaps you could consider a roomate, or taking on additional jobs, etc. until you pay off some of your bills.
Ultimately, the question is whether you can afford your lifestyle or not, and that is a question only you and your family can answer. I wish you the best.
