I will be considering replacing some of my windows in the future. Recently I had my house re-sided and had a chance to see how things were looking "under the surface" for much of the home. There were a few surprises with significant rot in plywood due to leaking around some of the windows, but I think that issue has been resolved.
One question that remains is how to deal with the windows, and what will be involved with their replacement.
Picture

Questions:
- Looking at this picture I see rot in both the sill and the bottom part of the frame, is that correct?
- Would be replacing the frame when the windows get replaced be a good idea? Is it necessary if going from one window type to another (awning vs double hung)?
- What is involved with replacing a window frame? Is the siding effected?
Desired Replacement Windows:
- Something that will not rot
- Something that does not require paint
- Double hung. Would consider an awning window again if I could lock it tightly shut. These windows do not have that feature and frequently gap ever-so-slightly open
- Thermally efficient and well sealed (I live in area where heating is more important than cooling).
Edit:
This is how the windows look now:
