IMO, RAW says choose a level 1, 2, or 3 spell and get extra castings of it. Free castings of a spell are at their base level, unless stated otherwise.
If I were your DM, I'd allow you to choose a level 1 or 2 spell upcast to 3, if only to broaden the spells that are good with the feature. Treantmonk didn't like how few 3rd level spells were spammable, and thus optimal for the feature. Being able to at least stick an up cast cure wounds in it would be great. I'd rather someone do that than have their homonculus fire off 10 fireballs a day.