We will be leasing a home for the next two years. We have two choices in our desired neighborhood- a 2600 sq. foot 4-bedroom home, or a 1512-sq. foot 3-bedroom home. We have 3 kids full time (ages 9,8, and almost 4) and one teen that is there part-time. Currently we have about 2800 sq. feet and five bedrooms, so even "big" house is smaller than we're used to.
Little house is $500/month cheaper than big house. It's also in a better location in the neighborhood, and the kids would go to a better elementary school. The yard is better suited for playing--big house is on a hill with rock stairs to the back yard, and a fire pit/paver patio taking up half the flat part at the bottom of the hill. The bus stop at little house is across the street instead of around the corner. Because it's smaller, it would also be less housework for me.
Big house's advantage is that it's big, and that's about it. My daughters wouldn't need to share a bedroom, and we'd have a separate room for video games and computers. It's prettier on the outside, but in poor shape on the inside (things like scratched floors, worn carpet, dinged-up trim, etc..)
So, obviously I'm leaning toward the small house. But am I deluding myself in thinking we'll be fine?

FWIW, we can afford big house, but would have less of a down payment saved for our next home. That $500/mo would go straight into that fund.
Which would you do?