Demand for U.S. mortgages held last week near six-month lows as the highest long-term borrowing costs since August stifled refinancing, a Mortgage Bankers Association survey showed on Wednesday.

Average 30-year mortgage rates jumped 0.10 percentage point to 5.18 percent in the January 1 week, up more than a half percentage point from the record low in March, driving down refinance requests to levels last seen in early August.

The rate was last higher in late August at 5.24 percent.

Mortgage rates are going to be on an upward trajectory throughout the year and increase significantly, which means refinance volume is going to drop significantly, said Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University.

Total mortgage applications eked out a 0.5 percent rise in the January 1 week after slumping nearly 23 percent in the Christmas week to the lowest level since late June.

When total demand for home loans has been at its highest last year it was due to a surge in refinancing rather than for home purchases. The highest unemployment rate in more than a quarter century and record foreclosures has kept many consumers from making such a major commitment.

The industry group reported two weeks of loan demand on Wednesday, as its offices were closed between the Christmas and New Year's holidays.

We're not out of the woods in terms of housing, said Lea.

Demand will drop in the second half of 2010 after an expanded home buyer tax credit ends, and as loan defaults and foreclosures mount, he said.

I don't see the current programs being that effective in terms of alleviating that problem, he said. If that continues it will provide downward pressure on housing prices and the economy overall.

The mortgage industry group's refinance index dropped 1.6 percent in the January 1 week to 1,976.9 after tumbling more than 30 percent the prior week. At its 2009 peak, the refinance index topped 7,400 last January.

The purchase loan index rose 3.6 percent to 212.1 in the January 1 week after a 4.0 percent drop the prior week.

The tax credit is not the only government support to the fragile housing market that will peel off in the spring.

The Federal Reserve by March 31 will have bought more than $1.4 trillion in mortgage-related securities, aiming to hold down borrowing costs and revive housing as well as the economy.

Those purchases end soon before the tax credit also expires. Borrowers qualified for the $8,000 first-time buyer credit and $6,500 move-up buyer credit must sign contracts by April 30 and close on loans by the end of June.

A tenuous housing rebound may not have enough impetus on its own to then withstand the giant obstacles of double-digit unemployment and record foreclosures, economists have said.