Yes, an HDMI switcher is a cheaper way to go
Normally I prefer to use an AV receiver though, so everything can be controlled by as few remotes as possible. Having to stand up and physically flip a switch, like you do on the $25 HDMI switchers, is a bit of a pain.
FWIW, ceiling speakers stink for providing good surround sound. At best they provide 'meh' sound because they are pointing the wrong way. Ideally you would create a sound field with adequate separation to maximize the quality. This means the speakers fire toward you from slightly behind and to the sides. See here:
The sub may be placed almost anywhere (hidden in a basket, for example), but your front/center speakers should not be occluded by solid material.
Your current receiver would likely also be able to accommodate an AppleTV. Your kids could use AirPlay on their iPod touches to stream content wirelessly to the system via the AppleTV. It's probably the most popular feature in my own home
Second vote for getting a Harmony universal remote. Very useful devices that are easy to set up.