Creating an answer as requested...
While this is somewhat ancillary to the question asked, I suggest looking into the merits of keeping the current home and turning it into a rental property. If your market would support renting it out at a rate that covers the costs of keeping it, doing so could put you way ahead in the long run.
I recommend doing a bit of research on your local rental rates and property management fees. Essentially you are looking for projected rent to cover, or slightly exceed, the current mortgage, taxes, insurance, management fees, and other expected expenses. A slight deficit might be acceptable to you too, but be realistic about how much you are willing to put into the old home as opposed to the new, and when you will be able to recover those expenses.
Don't fall into the trap of trying to manage the property yourself. You are moving away and will not have time to deal with the day to day issues of keeping the place maintained and occupied. A good property management firm is well worth the cost.
The plus side of going into this arrangement, if things work out, is that you continue to build equity in the current home, without significant negative impact to your personal finances. Then once the mortgage is paid off, that portion of the rent payment converts to income for you.
Some of the major risks of this arrangement are:
- The place could sit vacant, causing you to have to cover its mortgage and expenses out of pocket.
- Significant repairs could be needed earlier than expected (they will come, but hopefully not until the place has generated enough income to offset the cost), causing you to have to come out of pocket to keep the place habitable.
- Someone could get injured and try to sue you as the property owner.
Again, a good property manager and properly crafted insurance goes a long way to mitigating these risks, but they never go to zero.
If you decide to go this route, I strongly advise setting up a separate set of accounts, and keeping books on the place as if it were a business. This helps keep the income and expenses of the property separate from that of your family, and forces you to make a conscious decision any time you move money from one to the other. I would also suggest talking to an accountant and/or attorney about the advantages/disadvantages of establishing a LLC or corporate entity, and turning the property over to it.
IF this seems like something you want to do after looking into everything, it doesn't necessarily have any great impact on your decisions with regards to the size/expense of your new home. Although, that you are still carrying the existing mortgage could impact your financing options for the new purchase, potentially forcing you into the smaller home. In the absence of that however, going with the smaller new home leaves you with more disposable income to help offset the risks noted above.