Re-fi offer from our lender (Wachovia)

[Dave W.]

We currently have a pick-a-payment ARM. We're not behind in the payments, but are paying the minimum pymt, resulting in about $1k/mo being tacked onto our outstanding loan amount each month in deferred interest.
Our lender contacted us w/ an offer. They will have the property appraised (the loan amount is up to $409K, the rep on the phone guesstimated the value to be around $241K--not sure how she arrived at that), and give us a 1st mtg (FHA) at 97% LTV, with the remaining amount up to what we currently owe put into a second mtg w/ 0% int for 3 yrs.
As of 11/6/08, the estimated loan amt would be $241,530.00, at an int rate of 5.75%, w/ an APR of 6.155%. Lender would pay $6,411.00 in settlement charges, & we would pay $1,532.00 (interest for 9 days, hazard insurance, & recording fees) .
We've heard a lot of info on the news about banks not wanting to work w/ homeowners, or not taking the first offer the bank comes up with, etc. We live in Lodi, CA, so I don't know if the market's hit bottom yet, or when it might start going back up. Of course, if I knew that, I could be a rich man!
I'm wondering if we should take this offer, or tell them we want the FHA loan at 80% LTV, with the remainder on the 2nd so we don't have to pay PMI? We don't want to stay in this house, so we're also thinking of renting it out & keeping it, or renting it for a while until the market picks up & then selling, or ??? Even though we're not behind in the pymts now, if the mtg goes to 125% of the original loan amt, they can recast the loan immediately.
Hope my explanation was clear, & included enough details.
Any suggestions?
Dave.