I understand it's definitely cheaper to live farther out, but what about the things you love to do or the social aspect of living closer into the area you hang out in? How do you put a price on what you enjoy?
How do you judge what may be the best investment?
This is a question that almost all of us wrestle with at some point in our lives. This will all come down to your priorities and what you value more in your life -
not necessarily only money. Unless the difference between these homes is significant, then any additional costs for a home in an area that you might value more will probably come out in the wash by the end.
Picture yourself in both homes. Does one home make you feel more satisfied than the other? If I may read into your post a little, it certainly sounds like you'd rather live closer in to the city with more stuff available to do. If so, does this desire to live closer to "stuff" mesh well with your soon-to-be kid? Meaning, would you rather raise your child in the suburbs or the city?
In my view, if living closer into town makes sense for your family, even if it means a more expensive house, I would probably spring for the more expensive house at your desired location (again, provided you aren't slapping down an additional $500k or something crazy). Ultimately, you will be a happier person, which will translate into a happier marriage and home life in general, happier commute into work, reduced stress level, etc. Any upgrades that you do to the house can come over time. If you do the work yourself, you obviously save money on the labor, and by the time that you move away from that house, you might stand a good chance at making some serious cash with it.