U.S. mortgage applications rose for the first time in three weeks as demand for home purchase loans reached the highest level since October, data from an industry group showed on Wednesday.

If demand for home purchase loans, a tentative early indicator of home sales, continues to rise it will bode well for the peak home buying season in the spring.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 1.3 percent for the week ended March 26.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 2.2 percent.

The MBA's seasonally adjusted purchase index increased 6.8 percent, hitting its highest level since the week ended October 30.

Michael Fratantoni, the MBA's vice president of research and economics, said the activity may reflect the looming expiration of a homebuyer tax credit, just as many homebuyers in October had rushed to get loans closed before the original expiration of the tax credit.

We may be seeing a similar pattern now, as the extended version of the tax credit ends next month, he said in a statement.

The government's $8,000 tax credit for first-time home buyers originally was to end on November 30. The Obama administration then extended and expanded the program, adding a $6,500 credit for home owners buying a new residence and increasing income limits. Eligible borrowers must now sign contracts by April 30 and close loans by June 30.

Leif Thomsen, chief executive of Mortgage Master, in Walpole, Massachusetts, said the tax credit has become less relevant in boosting purchases over time, because most people who could have taken advantage of it have already done so.

There are still some procrastinators out there who have yet to pull the trigger on their decision to purchase a home and they will find themselves out of time very soon, he said.

Meanwhile, higher mortgage rates are muting home loan refinancing. The MBA's seasonally adjusted index of refinancing applications decreased 1.3 percent, reaching its lowest level since the week ended February 19.

Interest rates are the No. 1 indicator of how the housing market is faring right now, with unemployment coming in a close second, Thomsen said.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.04 percent in the latest week, up 0.03 percentage point from the previous week and also above the year-ago level. An all-time low of 4.61 percent was set in the week ended March 27, 2009, based on a weekly survey conducted since 1990.

The MBA said fixed 15-year mortgage rates averaged 4.34 percent, up from 4.33 percent the previous week. Rates on one-year ARMs increased to 6.88 percent from 6.75 percent.

Mortgage rates play a crucial role in housing affordability. February home sales data indicated a lull in the market after signs of a recovery late last year. New home sales fell for a fourth straight month in February to hit a record low, while existing home sales fell for a third month.

(Editing by Chizu Nomiyama)