Interests are so low now it may not make any sense to pay points to cut your payment down by a few bucks. Remember, the lower the interest you pay, the lower your homeowner deduction is. I encourage you to take a shorter term if you can afford it. Now's the time to take advantage of the market by cutting your interest paid to the banks. If noting else, send in those extra principle payment.
Also, make sure your doing the best loan for your set of circumstances. I can't tell you how many times I hear someone did a FHA loan when they could have done a USDA. The savings just in monthly mortgage insurance could have your hundreds of dollars and thousands over next several years and the USDA requires no down payment and delivers a lower monthly payment.
What kind of property do you own? What's your credit like?
Technically, FHA does not have a credit score requirement for FHA streamline refinances, but most lenders do.
You can only go up to 97.15%or 97.75% of your purchase price if you just bought the house. Since you put 3.5% down, there's not a lot of room to roll in new closing costs.
What a lender typically does to help minimize out of pocket expenses for a consumer is offer a higher than market interest rate which allows them to cover more of your closing costs on the refinance. Based on the size of your loan, I'm guessing that's why you're being offered a higher rate. I don't want to go into all the details, but it is easier for lenders to pay the borrower's closing costs when the loan amount is around $300k or higher. If you want more details as to why, just let me know and I'll spill all the geeky loan info.... more