Multiplayer Networking Options (Indie Games)

Hey everyone,
I've recently wanted to start developing a multiplayer game, and as far i can tell there are 2 options:
1: Allowing players themselves to host a server from their client. As far as i can tell this could be quite laggy and also result in a lack of servers.
2: Using a service such as Photon or Amazon EC2 to host the servers and allowing games to be started on these.

What I am aiming for in my game is for players to be able to just choose a gamemode and play or start a private game(still on the cloud, not their client). This is my first ever attempt at tackling networking, so any help would be appreciated (E.G: links to explanations, etc.). My question is, how is the best way to create this (matchmaking system), while keeping minimal lag.

I also would like to keep this fairly low budget .

Thanks,
Etched