Hello Metgirl05. I am a work-outside-the-home Mom, (PE with about 13 years in civil engineering). I have two kids, 7 and 4. I hear what your saying.
My opinion on your questions . . .
You said: "I am worried that with less than a year of experience and then 4 or 5 years off that once I am ready to get back to work I will have an extremely hard time finding someone that will take me on."
I don't think you will have an "extremely" hard time. It really depends on the market. If employers need people, you will have an easier time getting a job. Likewise in a tighter market, you may have a little harder time. You basically will have to start out at the bottom all over again. This is not necessary a bad thing, just have patience. At my previous employer, I worked with a female CAD person. She said she used to waitress. One day she got sick of waitressing, so she started doing CAD with no previous experience. I know it is not the same as engineering but people start/change new careers all the time. I see you as no different than someone deciding to start a new career mid-life. People do it all the time. When the time comes to return to work, if you have the desire and are persistent (and perhaps take some refresher courses), I think you will eventually get your foot in a door somewhere and be on your way.
"Are employers understanding of this type of situation?"
Overall, yes I think employers ARE understanding of this type of situation. There probably WILL be employers who aren't, but you may not want to work for them anyway if their value system is such that they don't understand your decision.
". . . should I really reconsider daycare, go back to school so that I am not completely out of touch?"
I personally think it is unrealistic to think that you can go to school or work-from-home part time "to stay in touch" while you are home with very young children. Before I had kids, I thought this was possible. Now that I have kids, I got educated real fast that taking care of children is a full time job. Also, you don't want to fill your every waking moment at home squeezing in work. After all, part of the reason one chooses to stay at home is to ENJOY your child's childhood. Personally, I question a parent who says they want to "stay at home to raise their children" and then have their nose buried in a book or a computer. They might as well be at work.
My personal story;
I purposely waited to have kids to give me time to develop some professional self confidence. This is not necessary though. I really wanted to stay home until they started school and I also had the same concerns as you regarding re-entering engineering after being out for years.
At the time, my husband didn't make enough money to support the family. He did not want me to stop working because he didn't think we could make it and frankly he was right. So we decided daycare BUT I would work a reduced schedule, 32 hr/wk. I approached my current boss about a reduced schedule and he reluctantly agreed. Later when I quit that job, he said he was never happy with my part-time schedule.
I now still work part time 32hr/wk (it has been 7 years) and my current employer has no problem with it. I do not get the big important projects but it is a tradeoff I am willing to make. My youngest (4) starts school this fall. I will probably go back to full time at that time. Part time work is a godsend!
I cried when I had to send my baby to daycare. I would take my lunch hour(daycare was close to work) to go and just hold my baby in my arms and smell her baby hair. Last week, my 4 year old told me that the babysitter said that she was her "second Mom". Ouch. I sometimes feel that my second child loves that babysitter more than me. I sometimes feel that I haven't given my second child as much attention as she needs. I'm always so busy. On the plus side, daycare and work provided a structure that seemed to help my baby (and me) sleep well. She always slept better through the week than on weekends ( I guess all the stimulation tired her out.)
I took 10 weeks leave with my first child and 12 weeks with my second. Both without pay (small company) and used savings to pay bills. At six weeks, my first baby was still waking up 2 and 3 times a night and I was exhausted. I agree with other posters on taking a decent maternity leave. Don't rush it. Who ARE these people that go back to work after 3 weeks? At 3 weeks I was barely getting a shower everyday let alone being able to go back to work! ?
Anyway I hope some of this helped. Good luck with whatever you decide and congratulations on your little one.
P.S. Your kids will always need you. Even (especially) when they are school age and beyond! Not just when they are babies.