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New Insulation or New Walls?

Our small rambler home was built in 1960. It is time for some renovations. On every outside wall, nail/screw heads are showing through the drywall on each stud from the inside. A local carpenter/friend has guessed it is caused from condensation rusting ungalvanized drywall screws from poor insulation in the walls.

Blowing insulation into the walls would save time and money, but will 2 coats of primer and 2 coats of paint keep screwheads from showing through in the future? Is our best and most cost effective option to tear down inside walls, install new-rolled insulation and replace with new sheetrock? We recently installed "Renewal by Anderson" replactment windows and would need to salvage our current window sills and frames. How will this be possible?

Your help will be apprectiated! Thank you in advance!

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