Like cam said, 7.1 is not always better than 5.1, particularly in a smaller room. And don't worry about "wasting" the extra amplifier channels on your Onkyo. Because all the channels share a common power supply, there will be more current available to the channels you are using (notice the power rating is highest when only two channels are used).
Since you're only going to be watching movies, you don't need super accurate speakers. In fact, since you live in a townhome, you (or your neighbors) probably don't want thunderous low bass. That's money saved!
I think you'd be well served with a less expensive speaker set, possibly a "box" system. Save $1200 to put into the system that you use to listen to your music.