Usually I'm full of compassion and helpful advice, but WOW, your self-centered succubus of a WH takes the cake!
Kick his butt to the curb, but quick. He's presented you with an option that works great for him, and subjects you to a life of pain and ongoing agony. You know why he wants that arrangement? Because you make his life very comfortable and shield him from the consequences of his poor decision-making (refusing to get help for his issues and his lack of ability to keep it in his pants). Tell him thanks, but no thanks to his offer, tell him to pack his crap, and get out of your house. "Your" being the singular version of that word, not the plural. You're too old for housemates, and you wouldn't want to expose your kids to that.
Get to a lawyer ASAP and set up support and visitation BEFORE the divorce if you can, so that doesn't hold you up. Tell your bright and shiny new lawyer what you plan to do to separate finances (see below), and have him or her let you know what is legal, and what else needs to be handled. Then file with cause, if your state has that. Mine did, and it only took me 5 weeks to obtain my freedom and cut the choreographer of the pick-me dance out of my life. My was he shocked when I ended it by taking the needle off that record and smashed it into the ground!
Regarding finances, open up new accounts in your name only and move all of your money to them. Then go close your joint accounts and give him the check for what's left over after you've taken your money out. Be sure to update all of your auto-pay bills with your new card/account information. Get everything you can into your name only. Cancel all of the joint credit cards, and start a pay-off program. Lastly, don't forget to change your beneficiaries.
Then inform him that you have a counter-offer. You won't go after him for alimony if he signs a quit-claim deed. If not, you're going for it. (Keep in mind that there are a lot of things that you can propose/say to your STBXWH that your lawyer cannot. Deals like this are one of those things.) If he bitches, compromise by agreeing to pay him 1/4 of the equity in the house. Then go get a home equity loan for his 1/4.
Don't worry about grace or style. (God knows I didn't have any!) Worry about being fast and decisive, and not taking any crap. He's handed all of the power over to you. Use it.
Then get you and the kids into counselling and TAKE CARE OF YOU ALL.
Look for your anger, and use it to motivate you into action. How dare he treat you and your kids that way! Be decisive, be sure in your actions, don't inform him of what you're doing before you do it, and don't take any crap from him. Chances are, you'll blow his socks off. That's a good thing. While he's still in shock and awe, he's less able to argue with you.
I'm so sorry he has done this to you. But at least he's not pretending anymore, and you're now free to go find somebody worthy of you, when you're ready. The bonus is that you won't have to entertain his asinine suggestions about how you can ruin your life anymore.
I don't know why your story has pissed me off so much, but I really am galled by his behavior. Maybe because my XWH had similarly idiotic ideas that shined a spotlight on how he had lost all touch with reality. Yeah, I was like "Thanks but no thanks. I'll run my own life now, and you can handle your mess of a life on your own. I'm not going to facilitate you flushing your life down the toilet. Best of luck to you, LOSER." (Of course, it didn't feel like that at the time, but I hit a point where I had just had enough, and once I hit that point I moved very quickly and decisively. But looking back on it, that's what I did, sans the calling him a loser part.)
I had a therapist once tell me (when I kept complaining about a situation in which I felt truly powerless, but really wasn't) that if I just did one thing to work towards a resolution to my problem, I would feel so much better. Like do 1% to solve the problem, and I'd feel 50% better. Of course, I thought she was crazy and deserved to be the one on the couch, but damn if she wasn't right.
You can do it. Even if you don't think you can, YOU CAN DO IT. Because realistically, what's the option? Yeah, I don't think you want that.