Number 1 seems sufficient. I'd not make it bigger because it does not have good access to a bathroom, so would never be the logical "master bedroom" choice. If you were going to also add a small bath, then it would be a normal location for a master.

What is your budget on this though? You might be surprised what it will cost to add on a small addition.

Will you miss the windows in the family room?

Thanks, Kirkhall. You're probably right. I thought about adding a bathroom, but we don't really need a third. There is one right across the den from the guest room (which can be closed off to make an in-law suite). Would additional square feet add substantially to the cost, though? Seems like the labor wouldn't be too much different, and that's the biggie.

I'm OK with losing the windows in the family room. We have a nice set on another wall, and light also comes through the back door and laundry room.

I was hoping to do the addition and deck for under $50K. My contractor was here yesterday and said I could probably get away with about $35K. Yay! It does make sense to add on in this neighborhood, as prices have skyrocketed in the past year and a half, and most smaller homes are bought by developers who blow out the back and make them much bigger.

The extra square footage for a bathroom is not what is expensive... It is the plumbing and the codes that get expensive (like, whether or not you can even have a third toilet by sewer capacity/code).

I was wondering if there was a way, instead, to put the bedroom where your FR is, and make the addition the FR area.

But, I think you have a solid plan above, if you are happy with how it will function--mostly strictly as a guest room/office.