The most important thing here is that your wife is not on-board with the idea of downsizing. Unless you can convince her that some of the other benefits (such as a smaller commute) are worth it, you need to find other ways to meet your goals. So the challenge should be, what can we do to come up with an extra $600/mo to fund retirement, college funds, etc.
Also, you've said you paid 569k for the house and now it's worth 539k. By definition you are losing 30k (plus commissions) by selling the house. Just because your loan isn't underwater doesn't mean you aren't losing money.
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financial checklist:
[x] emergency fund fully funded [x] no cc debt [x] >10% to 401k
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