You're 100% correct. I don't know the history of it, but they probably thought that if they negotiated in good faith, got an initial agreement with Egypt, that would be followed by good faith efforts to solve the refugee problem. My sense, though, is that many of the people in the West Bank, and perhaps Gaza, aren't "refugees," but Arabs from other Arab nations attracted by Israel's economy. "The Palestinian People" is something of a myth.
Think, the diplomatic skills of Jimmy Carter. The objective then was a "peace treaty", like Israel's at peace with Egypt, but in fact it was really about the return of the Sinai. Lasting peace then, as now, involved a change in the Arab mindset, not something easily dealt with in the short term.
Of course you have the bonus of a Nobel Prize for Jimmy, plus billions in aid to maintain Israel's military at a level that they could cope with the geographic disadvantage, and to Egypt to allow them to build their military to the point that they could try in again in a few decades.
It's off topic, but the Saudi-Egyptian forces are becoming, on paper, formidable. The IAF views their combined air wing as a mechanical equal (just need to train the pilots to do something other than flying into buildings).
The road map, similar. The real goal isn't "peace", that would require confronting Egypt, Syria and the Saudis, rather a "state", which can be accomplished, leaving the problems for another day.