The sales pitch for the higher rate as a replacement for PMI is that interest is tax deductible whereas PMI premiums are not. The other side of the coin, however, is that you must pay the higher interest for the life of your mortgage, while mortgage insurance will be terminated at some point. There is no way you can figure in your head whether the higher rate or PMI results in a lower cost. However, the Pay For Mortgage Insurance or Pay a Higher Interest Rate calculator on my web site will do it for you. The higher the PMI premium, the more likely the higher rate is a better deal.
Premiums vary with the type of loan, term, down payment and other factors.
The smaller the increase in the interest rate charged in lieu of PMI, the greater the advantage of the higher rate loan. Early PMI cancellation makes the higher rate option more expensive. Under the most common PMI premium plan, the premium drops sharply after 10 years. In that event, the higher interest rate loan would be the better deal if you hold the mortgage less than 24 years. This was sufficient to reduce the cross over point to 13 years.