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Yvain comments on Rational Home Buying - Less Wrong
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Most of this assumes you're treating your house as a place to live and not as an investment. Because you'll probably be paying interest on a mortgage, it's usually not a smart idea to pay more than you need for a house - but I admit that the possibility of selling the house later is a major factor that alters a lot of these calculations.
Since a house is inevitably both a place to live and an investment, it would seem to be appropriate to treat it as both. (Unless doing so spoils your enjoyment of it as a place to live, or something. For what it's worth, I've always thought of houses both ways, have never noticed such a negative effect, and have always been happy with the results on both counts. But I've been pretty fortunate.)
[EDITED to add: I agree that the extra mortgage interest you'll pay is a genuine extra cost -- and that, not the $35k price difference or whatever, is what you should be weighing against whatever you're paying the extra for. How the two figures relate to one another depends a lot on the mortgage interest rate, how quickly you repay, etc.]
Good point, I'll edit.