This wouldn't be MMM if someone didn't remind you all that a large house is LUXURY. You can choose to indulge in that luxury - my husband and I have a massive 1,600 sqft 3bd house with PLENTY of room for children down then road. I grew up in a 900sq ft 3 bedroom house as a family of 5 so to answer your questions:
1.) No kids do not NEED that much space - you may decide you WANT to give your kids their own space as they grow up but it's not necessary. Also, if you're in a region with basements an unfinished basement with some carpet thrown down is more than enough for any kid (that's what we got and we loved it). Plus, bigger rooms and play rooms just means more space to fill.
2.) It's hard to even ballpark that because it depends on the changes, if you're going to work yourself or outsource it, etc. I'm sure a google search would shed some light on average kitchen renovations, opening up floor plans etc.
3.) Depends on interest rates and PMI's. As interest rates start creeping up you should factor that + the pmi rate in to see what your interest rate is. It also somewhat depends on the person to me - if you're not putting 20% down as a strategy to invest more then great. However, if you have $X and you want to stretch it further and buy a bigger house then I say buy what you can afford with 20%.
4.) Our city occasionally has speed dating for realtors. It was a cool way to network and meet multiple agents. We picked one that is quick, responsive, friendly, and flexible. Everyone's different - i suggest meeting with a few and asking for recommendations from people you know.