I would definitely go with the 3/2.5, especially with the good incentives. The reason being is that although Sunnyvale has a higher resale value you are paying more for less. The 3/2.5 will have more potential buyers when you go to sell it so I believe will have a better chance of having a higher appreciation over time, but the schools in sunnyvale and desirablity of the area will hold it's value longer so I believe that the choice will be up to you as to location, size, schools. You need make up your mind as to what is important to you, and go from there.
Of the two answers you've received so far, I tend to agree more with John. Unless you're a single person, living alone, that 1050 sq. ft. home will seem pretty small pretty quickly. And a 3 bedroom home will sell more quickly than a 2 bedroom home when you're ready to move on. (And that's regardless of whether you're in Sunnyvale or Milpitas.)
You need to ask yourself more questions. Which home is closer to your work, your school, your church, etc.? Which design do you prefer? View? You're going to be spending time inside! How do the home warranties compare? How about HOA fees? Amenities? And parking. How many garages or spaces will you get?
Milpitas has more than two dozen parks, and is known for its vibrant ethnic mix. When the weather is good I walk to church, through a park, and see Chinese playing tennis, Hispanics playing soccer, and Indians playing cricket. Milpitas is fun! City Hall was constructed in 2002, a new, expanded Library has recently opened, there is a Community Center, a Senior Center, a Sports Center, and a Teen Center. Milpitas also has the Great Mall and McCarthy Ranch.
Best of luck Soumya; I know you'll make the right choice for you!
KB Homes, Bordeaux. is the best value. It's Sunnyvale. When you're talking real estate, location is most important. Although Bordeaux is located in close proximity to the brick yard, it's still Sunnyvale; there are plus's & minus's to this community. DR Horton is an average builder but Milpitas location is not going to give you best resale value, compared to Svle (just talking real estate). Before you decide where to move, make sure to look at all the property disclosures to find out if it's a good fit for you.
Best of luck in your home purchase!!