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One more thing: I do believe that you have some choices about where you want to live; you said he want houses next to one another, what do you want, this is not about him, he forfeited that creating this situation. You are being gracious but you have the right to decide some things. You might prefer to be in the same school district and bus route, but not right next door. Close enough to ride their bikes, but not that you have to watch them and their relationship everyday. Something to think about
I applaud you for taking the high road where the kids are concerned, but it does seem like you're being a bit of a doormat. Why wait for your "husband" to fix the problem he caused? He knew he couldn't afford another family when he engaged in the affair and made a baby. Why should you and your children be the ones stuck in a crappy apartment? That's where HE needs to be!
At least talk to an attorney to get a better idea of where you would stand if you decide to pursue divorcing. Just getting legal advice does not mean you have to go through with filing a suit.