Atonement: Penal vs Incarnational?

Today I'm wrestling with the Atonement.  On the one hand there is the theory of atonement that I'm most familiar with, that is the Penal Substitution Model.  On the other hand there is what I guess could be called the Incarnational Model.  Of course there are other models, but today it's between these I'm wrestling with.

As I said, the Penal Substitution Model is the one I'm most familiar with, likely because it's the dominant theory in the West among Protestants and Catholics.  Basically it posits that man because of his sin owes a debt to God, and Christ's death on the cross is the payment of that debt.  This theory has problems and advantages (for me anyway).  The problem for me is that it paints a picture of God as angry and wrapped up in concern over His honor.  While one may approach this God, his heart in reality may be far from Him.  This was certainly my experience for many, many years.  The advantage of this model is (again, for me) that it says the debt is paid.  It is finished (John 19:30), over, and done!  I can approach God with the relief of knowing that my debt is paid.  Especially this view is helpful when one is filled with guilt and self-loathing over one's sins.  In that case the Penal Model is like a cleansing acid, harsh, but effective.  It's like having a legal document that says you are acquitted, and now one can claim otherwise.  So, advantages and disadvantages with this model.

The Incarnational Model is one I only came across in the last few years, after reading The Fingerprints of God by Anglican Robert F. Capon, a really good writer.  In this book he claims that the Incarnation of Christ has been in effect marginalized by medieval theories of atonement, such as Anselm's Satisfaction Theory, which posits that Christ's death was a satisfaction made to God's offended honor and dignity.  (It is from this theory that came the Penal Model I wrote of above).  In the Incarnation Model, just Christ's becoming Man is atoning.  He organically unites Himself with humanity as one of us, so whatever is true of Him is true of us, and vice versa.  The advantage of this model is that it really inspires trust, being that Christ is fam.  He is not some alien being paying a debt, he's part (head actually) of the human race.  He's one of us.  I really don't have much of a problem at all with this view.  However the New Testament speaks often of the work Christ did on the cross; it speaks of atonement, propitiation, "hanging on a tree," blood, the cross.....  Paul and Peter obviously thought Jesus's death on the cross itself was of great importance.

Now in all of this I'm not saying I'm having to choose between the Penal Model and the Incarnational Model.  I'm just thinking of how each model effects my trust in God, how much either gives me peace and assurance.  One way to tie the two together (in my mind) is to remind myself of the biblical idea of the Kinsman Redeemer.  This is from the Old Testament, where its said that a male relative could help a relative who was in need, such as a financial need.  This is a picture of Jesus, the Infinite God of existence who incarnates in the man Jesus, joining with humanity, the one who goes on to pay a debt we could not pay.  Our Kinsman-Redeemer who rescues us from our dire predicament.

How does this tie into Lutheranism?  That's what I'm working out right now.  How do the Sacraments deliver the benefits of the Incarnation and the Propitiation (satisfaction)?