As others have kind of mentioned, it is a little confusing.
Is their financial situation such that they need the money that is locked up in the house? Or they simply don't like having a large portion of their net worth illiquid?
If it's the case that they need the money, I would say to sell it, take their $250k/$500k capital gains exclusion, and then downsize, or maybe rent. No matter what, they will have unlocked all the equity, freed themselves of the ongoing costs/taxes/etc.
If they don't need the money, then I'm not understanding what the concern is about having the money locked up in equity. If there is no concern about leaving an inheritance, then who cares if it's locked up in the house? As you mention, they are happy there.
No matter what approach they use to take money out of the house, there are going to be initial fees today, and they are going to have to be paying interest, and/or more fees for getting their money out. This is the primary reason I say to either just leave the equity in the home if they don't "need" the money, or to simply sell and move on.