Mortgage applications rose last week as record low rates lifted demand for home refinancing loans to its highest level in over 15 months, a development that could provide a much-needed jolt to the economy.

Home loan refinancing puts extra cash into consumers' hands that they can save, use to pay off existing debt or funnel into the economy through extra spending.

With worries of deflation and a double-dip recession rising, an uptick in consumer spending could be just what the flailing economy needs.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended August 20 increased 4.9 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 5.0 percent.

The MBA's seasonally adjusted index of refinancing applications increased 5.7 percent, reaching the highest since the week ended May 1, 2009.

The volume of refi applications last week was up 26 percent over their level four weeks ago, Michael Fratantoni, the MBA's Vice President of Research and Economics, said in a statement.

With rates this low, many borrowers who refinanced in the past two years may well have an incentive to refinance again, and this is likely increasing refi application activity, he said.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. The National Association of Realtors on Tuesday said sales of previously owned U.S. homes took a record plunge in July to their slowest pace in 15 years.

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.

More insight into the U.S. housing market will emerge on Wednesday when the Commerce Department releases July new home sales data.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.55 percent, down 0.05 percentage point from the previous week. That is a lowest level in the survey, which has been conducted weekly since 1990.

Interest rates were also below their year-ago level of 5.24 percent.

Paul Anastos, president of Mortgage Master in Walpole, Massachusetts, said overall production at his company has almost doubled in the last two months with 76 percent of the total new applications being for home refinancing loans.

Our overall volume is dominated by refinances due to historically low rates, but pure purchase volume has remained consistent in recent months and I believe it could actually increase as we enter the fall purchase market, he said.

If rates stay low as we head into the fall, I believe there will be a nice little increase in purchase applications given these low rates and the values available in the market, he said.

Rock bottom rates, however, failed to make a significant impact on demand for loans to purchase a home last week.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, increased 0.6 percent.

The MBA said fixed 15-year mortgage rates averaged 3.91 percent, down from the previous week's 3.99 percent, a record low. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 6.84 percent from 6.90 percent.