Heisenbergg

Sounds like a pros and cons list will help you visualize the right choice. Personally, I completed my Master's degree at the same university as my Bachelor's, which did suck. And I am about to start a PhD program in a different state; the city where it is located is relatively small but I have decided to live in the nearby city and commute. It'll be an extra 10-15 minute commute but to be in a populated area is important to me. Could you possibly do the same for your #1 school? Being in a program that is a "great fit" is the ultimate goal. But you do have to be happy when it comes to your personal life. If there is no way you can be associated with that city, then you should probably choose #2.

I am currently in the same boat as you...but my situation may be a bit different because I completed my undergrad/master's research, and now I am waiting to start a PhD program at a different institution. If you are continuing your research at the graduate level with the same lab from undergrad, then I'd advise to focus on that during this "lame duck" phase: not sure what your area of research is, but having a large sample size for data analysis and working out the kinks in the lab/experimental design will save you a LOT of stress down the road. Maintain your sanity by visiting friends on weekends, traveling [if you can], reading non-science books (highly recommend "The Way of the Wolf"), and getting into a gym routine. You could also make some money by becoming a private tutor. This time period really does suck, but it's all about making these next few months less difficult and doing whatever you can to get out of the house.