The Internet is a good resource for shopping mortgage interest rates. You can monitor mortgage interest rate data by looking at the Web site of your lender or other sources such as the Mortgage Bankers Association of America (MBA), Fannie Mae or Freddie Mac.

One way to monitor rates is to sign up to receive free alerts. An alert service notifies you by e-mail when interest rates drop to a level that entices you.

According to a report commissioned by the MBA in late 2000, the Web is used mostly to shop for rates and buy homes. In its home and mortgage shopping survey commissioned in late 2000, MBA found that 79% of the more than 1,000 respondents used the Web to shop for homes. Another 73% used the Web to shop for mortgage rates. Percentage rates for online applications and loan closings were much lower.

When shopping the Web for mortgage rate data, you also want to keep an eye on the average number of mortgage points that you have to pay to refinance or buy a home. Generally, refinancing requires that you pay fewer points than if you buy a new home. You may often refinance for 1 or fewer points, with 1 point equal to 1 percent of the loan amount. A new-home loan frequently costs 2 or more points.

To calculate the true cost of refinancing, you need to add any mortgage points or other closing costs to the stated, or nominal, interest rate. Together, these costs reflect your annual percentage rate. Annual percentage rate is your true cost of borrowing, stated as an annual percentage. APR lets you compare interest rates for two or more loans.

For example, say you borrow $100,000 at 8% for 30 years on a home that is appraised at $125,000. Your closing costs are $2,000, consisting of 1 discount point and $1,000 in other upfront costs. These figures result in an ARP of 8.21%.

You may be willing to "buy down" the interest rate by paying more in closing costs. Lenders are willing to lower the rate in exchange for more points at closing.

For example, let's assume your lender is aiming for an APR of 8.21%. Using our example, it would be willing to lower your interest rate to 7-3/4% if you paid $4,240 in closing costs. That way, it can achieve its target APR of 8.21%.

Returning to the calculator, enter a loan interest rate of 7.75%, $4,240 in closing costs, and 0 in discount points, leaving the other inputs unchanged. You will see that the APR is unchanged at 8.21%. You can work out any number of combination of closing costs and loan interest rate to obtain a target APR.

This example assumes you are seeking a fixed interest rate. How do you calculate the APR for an adjustable-rate mortgage loan? The practice is to calculate APR on an ARM loan with the assumption that the interest rate remains the same over the loan term. This is unrealistic, to be sure, since market interest rates change daily. However, no one, including your lender, can predict what interest rates will be one year from now. To simplify the calculation, the interest rate is assumed to remain unchanged.