Mortgage applications leaped last week as rock-bottom rates lifted demand for home refinancing loans to its highest level in 15 months, the Mortgage Bankers Association said on Wednesday.

Home loan refinancing puts extra cash into consumers' hands that can be used to pay off existing debt or funnel into the economy through purchases. By lowering a monthly mortgage payment it may also help some homeowners avoid default and foreclosure.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended August 13, increased 13.0 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 2.6 percent.

The MBA's seasonally adjusted index of refinancing applications increased 17.1 percent, the highest since the week ended May 15, 2009.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.60 percent, up 0.03 percentage point from the previous week's record low. The survey has been conducted weekly since 1990.

Interest rates were also below their year-ago level of 5.15 percent.

Thomas Meyer, CEO of J.I. Kislak Mortgage in Miami Lakes, Florida, said people in Florida, and other hard-hit housing markets, are finding it difficult to refinance because of appraisals coming in significantly below their current mortgage amount.

High unemployment has certainly had a dampening effect, but that runs up against the psychological orientation that now is the time to get a deal, with housing prices low and interest rates low, he said.

Meyer said he is seeing a pick up in activity, mostly in the home loan purchase business as opposed to the refinance business.

There is a feeling that we are at, or very close to, the bottom in the fall of housing prices and that now is the time to buy, he said.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. The Commerce Department on Tuesday said U.S. housing starts rose but to a much weaker rate than expected in July, while permits for future home construction fell to their lowest level in more than a year.

Low rates failed to foster demand for loans to purchase a home last week, with demand sliding for the first time in five weeks, MBA data showed.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 3.4 percent. Demand is down about 42 percent since the tax credit expiration.

To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

The MBA said fixed 15-year mortgage rates averaged 3.99 percent, up from the previous week's record low of 3.95 percent. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 6.90 percent from 7.00 percent.

(Editing by Diane Craft)