[editing - I fucked up the math in a big, big way here, leaving so others can see my stupidity]

Leaving this part to - I am an idiot and misread OP multiple times, and this will show just how off I am on that.

So we're talking about a 960Kish mortgage, right? Here's how I come up with that:

1. Payment reduces by $50 / month by pre-paying PMI

2. You save $256 / month on PMI by taking that option, but the interest is .25% higher

3. So your principal and interest must have gone up by about $200 / month due to .25% increase in interest rate - nearly all of that due to interest

4. 2400 / .0025 = $960K

So here's how I'd look at this:

Option 1 - Regular PMI at 4%

Option 2 - Prepaid PMI - you pay $6400 up front, and you also pay .25% more over the life of the loan.

So Option 1 is $256 / month until your LTV is such that you can drop the PMI - $3072 / year

Option 2 is $6400 up front, plus the extra .25% interest - $2400 or so in the first year. So you're paying $6400 to save $672 / year initially (the savings increase a bit each year), however once you reach the point where the PMI would go away any way, then you're paying that .25% extra for the life of the loan.

So, what I'd suggest - if you have the resources to do this, and the terms of the PMI don't prohibit this. Take the 4% regular PMI loan, then pay the loan down as quickly as you can to get the PMI lifted - if you can do this in 5 years, you come out way ahead - even at 10 years.

This all assumes that my calculation of your loan amount is correct.