Felix Garcia, 17, scored the winner in the shootout that followed 120 minutes of scoreless play.
Laredo had a chance to clinch the shootout in the fifth round, but Bucks keeper Steve Clark stopped Juan de Dios Ibarra's shot.
The shootout took a bizarre twist in the sixth round when Heat goalie Ryan Cooper initially stopped Bucks star Kenny Uzoigwe's shot, a weak effort off a cramping leg, only to have it redone because he came off his line too quickly.
The Bucks staff took more than five minutes to work on Uzoigwe's cramp, but Uzoigwe couldn't continue, forcing Ian Daniel to step to the spot for the Bucks in his place.
Cooper made diving save on Daniel's shot, setting it up for Garcia, who scored the 1-0 semifinal winner off the bench against the Fresno Fuego, to win the game to the delight of the 6,530 Laredo fans.
Aug. 11 in Laredo
Laredo 0 Michigan 0. (Laredo wins 4-3 on penalties.)
Laredo -- Cooper, Cruz (Ordaz, 56), Galvan, Infante, Vega, Ibarra, Mulamba, Quinones (Almack, 77), Vallejo (Blackwell, 101), Fender (Garcia, 52), Morales.
Michigan -- Clark, Daniel, Holody, Russell, Brunner, Jafta (Fuzetti, 104), Morisset, Nowak (Hernandez, 15), Shipalane (Balc, 85), DeMartin (Djokic, 53), Uzoigwe.