I can't give you a really comprehensive answer on this one, but I can give you a couple of ideas, because we were recently considering some remodeling too. It seems like it would be hard to make a decision in this situation, because it seems like there are a lot of factors missing in the equation. So right now I might try to get more basic information about each of the various options.
I guess one thing I would do is to talk to a realtor or two. Tell them you are thinking about possibly selling, and have them come over, look at the house and do a market analysis of the neighborhood (what similar homes in the area have been on the market, how much they sold for, how long they were on the market, etc.) Generally they will do this for free I think. Talk to him/her about what you would have to do to sell, and what you think the house would be worth in it's present condition, if you did the basic fix-up (the septic thing), and what it might be worth given the neighborhood value if you did the remodeling you anticipate you would do. Keep in mind that you might not get what the realtor says you should list it as, and that you would be out 6% of the selling price for the realtor's commission, plus moving expenses and closing expenses on the new house.
Also, I would start going to open houses or maybe looking at houses online to get a sense of what homes are available, if you are likely to find something affordable that you like, that meets your needs better.
You can also get an appraisal privately on your own, which will give you a more realistic sense of what the house is worth but will cost you some $.
I would also clarify how much remodeling you would need to do to make you happy with the house itself and if there are ways to fix any of the house problems. (Keeping in mind that as long as you have an adequate number of rooms and bathrooms for the number of people you have, a lot of "this house is too small!" problems too are just going to repeat themselves in a new house, because the bigger the house you get the more crap you will accumulate to fill it up with clutter--it's just the way it works!! It's like some weird law of physics!! Sometimes decluttering and a few new decorative things can make a big difference!) But what would be some options for making the house more liveable? Could the kitchen be remodeled, or maybe even it would be cheaper to move the doorways so it's not a thoroughfare? doorways be widened? Could you maybe put in some skylights or new lighting to solve the darkness issue? Or get some different types of window treatments? I would get several different contractors to come give you estimates--tell them what your problems are about the house, and just see what they come up with in terms of ideas. They might suprise you in terms of what they propose! (I had two people come out and look at my kitchen, and both gave me very dissimilar answers in one respect, but both said the same things about certain other things.) Get bids from them, it will give you a much better sense of what it might cost to do the renovations you would need.
Also, play out some scenarios--if you could wave a magic wand and get the house the way you wanted it, would you be happy with the neighborhood? Do the pros outweigh the cons, or vice versa? Which aspect is the most important to you? Are you willing/able to put more money into another property that might be more valuable in the long run? Or is affordability in the short term more important? How much equity do you have in the house? I would also think hard about how long you intend to stay in this house, or in this area. 2 years? 5-7 years? 10 years? I think this is a critical factor in making decisions about buying any new house or staying where you are at. What is your overall financial plan?
I find loan calculators to be helpful--there are some good refinance calculators or mortgage calculators on The lending tree. com. It can give you a sense of what your monthly payments would be on a new mortgage, and I think they have a home equity loan calculator too.
Hope this all isn't confusing and overwhelming you even more!! Just take your time and get more information step by step about all of the options. Good luck!!