Yes, the 5% assistance can go toward the 20% needed to get rid of PMI, if you choose to do that. You can choose to use the entire 5% on the downpayment and you would have to cover whatever closing costs remain. Or, you can do a 3% down conventional, use 3% of the assistance to cover the downpayment and then use the remaining 2% to cover the closing fees.

Now, the one thing to keep in mind is that it's not forgivable. So you will not be able to refinance unless it's a cash-out and you pay it in full. So whatever rate you get, needs to be lower than what you'd get with other forgivable grants and ideally lower than what's available now for a conventional.