I read you have an undergravel filter, what size tank is it? If you are changing to sand I suggest you go buy a corner filter or two if its a big tank. They are cheap, simple to clean and work wonderfully for the simplicity of their design. I change 1/2 my media every month of so. Filter wool may need chnaging more regularly. I use filter wool, activated carbon, and those ceramic noodle things. (absolutely fantastic invention)
Also on the topic of sand, yes WASH IT WELL! The sand in towel method sounds good. I put all my sand in a cloth bag and spent the next 30 minutes rinsing it. Then after it's in the tank it will need anywhere up to 6 hours to settle, depending on the density of the sand and how well it was washed. my 3ft tank took 4 hours to settle, axies didn't end up going in until 2am.
But yes, good luck with your little axies fungus, hope all goes well, and good luck with your tank re-decorating.