Whatever you decide - Before proceeding with any alterations - check with the building department in your town. Make sure you'd be allowed to convert the garage into a bedroom, and that it's not against code - see what, if any, permits or variances might be required.
Case in point - in one town in my area, what you are proposing would not be allowed, as garages must be maintained.
Homeowners who have converted garages to other uses, are advised to either restore them prior to selling, or at least offer to do so for a buyer.
This is just not the best time to sell unless there is a very compelling reason to do so (not what you would expect t hear from a real estate broker!). Look into a refi if your interest rate will reduce significantly and that will help lower your expenses. I just did a refi, combining a vacation property and my home into one and we realize a savings of over $500 per month. At that rate the cost of the refi will be recouped quickly and hopefully values will begin to climb again in the next couple of years! Best of luck to you!
We're underwater (bought at worst possible time in 2005, and are selling into a pool of foreclosures/short sales). We're not in any financial risk of losing the house so I don't believe a short sale is possible (plus since we're hoping to upgrade don't want to take the credit hit). From what I've read we can only refi at a lower rate (not drop principle) via the Home Affordability Act (or whatever it's called). Again, because we're in fine financial shape we're not eligible for most programs. Unless there's a plan I'm not aware of?? Overall we like the house/location/schools, we just need another bedroom... Ideally buying a bigger house would be better, but not at the loss we'd need to take. This is what brings us to looking at additions.