Old Siding: How to Insulate Behind

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I have a typical raised ranch built in 1963. I recently built an addition which is well insulated and sided with natural shingles. I need to do something about the exterior of the original house as it is painted green. I also need to insulate it. I could sand the shingles and blow in insulation but I am concerned that that insulation will settle. The other option I have considered is to remove the old shingles (too bad 'cause they are in good shape)put foam sheet insulation under new natural shingles. Which option do you think would be most efficient?

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