J,
Aha, new BIGGER windows. Translates to reworking the existing 2x4 framing a lot with appropriate headers, knee walls below the windows etc. So, indeed, the interior sheetrock has to go bye bye.
If you are gonna rework the walls that much for the new windows why not hold the top plate of each wall section in place with a dead man and replace the studs with 2 x 6's. What does your local code require for fire stops in the walls ?
Makes insulating with blown in the best choice and forget your rigid foam panels.
Wrap the house in Tyvek on top of the sheathing before appling the new siding material. Be sure to tape all the seams.
Waiting your reaction.
deralte