I think paying off a house is a smart move.
Find a job close to home. A different house may not be the best option if it isn’t in good condition. See Mike Holmes before signing.
http://www.hgtv.com/mike-holmes/bio/index.html
http://www.mikeholmesinspections.com/
The only way paying off the mortgage makes sense is if the interest rate is still several points ABOVE current rates, AND doing so doesn't deplete your savings. Otherwise, CASH IS KING in this economy and they'll need every penny they have for living expenses.
Consider the fact that homes are still going DOWN in value, and who wants to throw good money after bad by paying off a depreciating asset?
First thing: cut all UNNECESSARY expenses. Bye bye cable TV, etc..
Second thing, if there's still a mortgage on the home apply for HAMP, that's the home mortgage modification program. Assuming there's savings that can be used to pay for the home the next 12 months, they should qualify.
Third, if the mortgage is held by a local community based bank (and not some behemoth like BoA, Citigroup, Wells Fargo, Chase...) they can always walk into the local branch and speak with either the branch manager or a loan specialist who can talk about options to stay in the home by reducing payments. Believe it or not, Community based banks do NOT want to foreclose and they'll work with you to stay in the home. All bets are off if it's BoA, Chase, etc..
Fourth, do WHATEVER you have to do to NOT cash out your 401K. The tax implications are HUGE, the Government gets the best part of that deal. Do you really want to give Obama more of your money? HELL NO!
Finally, if they do end up having to sell the home, list it first and see what you can get out of it rather than just handing over the keys to the bank or going straight to short-sale. Depending on the market they live in, some markets are actually running out of saleable, move-in condition homes and seeing sales happen quickly. Where I live, several homes have sold within a week (one in a day!) because the inventory of quality homes is really very short. Take the cash from the sale (if you have to sell) and RENT somewhere until home prices stabilize and THEN buy something you can more easily afford.
That's the best advice.