Cost of living for Seattle is medium-pricey for the US but cheaper than pretty much any city here, and yep, interest rates are very low. Like in the 3-5% range. Don't forget to factor in property taxes when budgeting.
You might be able, depending on time available for house hunting, find a place in Queen Anne which is a fantastic neighborhood. It runs expensive but I've come across $400-500k places there several times. Same goes for North Beach area.
More realistically, I'd be looking in Ballard. The local elementary and middle schools are very well-rated at 7-10/10. High schools, I'm not sure who zones in that neighborhood. Roosevelt is another great option...Roosevelt High has a great reputation. We also like Wedgwood for good schools, low crime, nice architecture, etc. Greenwood is great for cultural diversity and community vibe. Further south, we like Beacon Hill. It's got a very "Seattle" vibe to it and is pretty affordable. Schools are hit and miss all over Seattle so you just need to check zone borders.
Eastside and the commuter suburbs are often a better bet for more square-footage and better schools/lower crime (not always, but usually!). Bellevue (East/West Lake Hills area) and Sammamish are both high up on our list while not being scary expensive. Now those are good for general education schools. Some of the inner city schools have some of the most amazing specialty programs like music, robotics, etc.
Kirkland, while very nice, is a Microsoft hotbed, meaning the prices have been driven painfully upward. You might luck into a gem there, though
Plenty of people commute from there, and much further out, to Seattle.
My favorite insider-info forums are http://www.city-data.com/forum/seattle-area/
kittennic: If you're only planning on a 3br, as opposed to my guess at Nanaimo's 4br preference, you'll have a lot of wiggle room in the 400-500k range. Seattle's not a ridiculously expensive town, it's just more expensive than cities that don't have thriving tech/aerospace industries
Most utility websites have their rates online, as does Safeway grocery chain (via online ordering site), local restaurants, city buses, petrol (gas!) price monitor sites etc, so you should be able to get a good idea of costs.
Nanaimo: How close will you be to "home" (Nanaimo, that is), btw?
A day trip or so? Lucky duck!