Modest income trying to make the right decision for my family

[Sarah Auriemma]

My husband and I own a SFH- it's a ranch 2/1 with a 2.75% interest rate. We owe 200,000 on it and have $100,000 available to us via a HELOC. We make a very modest income (about 80,000/year) and have 2 small children. We can't afford much more in a mortgage payment than what we're paying right now. Trying to figure out next steps between these options:

1. Use HELOC as down payment for new primary residence in the 350,000 range and keep our current house as a rental. Current house could rent for +$800-$900/month which would likely be enough to cover the mortgage and HELOC interest payments but we wouldn't be making any money. If the new house needs work or we can't find renters we would need to pull from our small savings which could be stressful.

2. Use HELOC to add an addition onto our current home to make it a 3/2. In this scenario we would need to be able to cover the monthly HELOC payments which we just don't have the income for right now.

3. sell current house but we really would like to hold on to it. It’s in a great neighborhood and is a perfect rental property. 

How do families make RE work that don’t have excess money in their budget at the end of the month?