NEW YORK - U.S. mortgage applications nudged higher last week, marking a third straight weekly rise, driven by a slight uptick in demand for home refinancing loans, an industry group reported on Wednesday.

Attractive mortgage rates and high affordability have been positives for the U.S. housing market, which has been showing signs of stabilization after a three-year slump, though the sector remains vulnerable to setbacks.

To be sure, demand for home loans pales in comparison to earlier this year even though rates are at similar levels.

The Mortgage Bankers Association said said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended Dec. 11 increased 0.3 percent to 667.3, roughly half the volume seen at the peak earlier this year.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 1.5 percent.

Stan Humphries, chief economist at real estate website based in Seattle, said refinancings are being held back for various reasons. A lot of refinances have already been done, he said.

Those that haven't been done are likely attributable to either homeowners who aren't in a position to refinance because of negative equity, or homeowners who want to move within the next couple of years and for whom the refinance costs don't make it economically viable over that short time frame.

Negative equity -- when the balance owed on a mortgage is greater than a home's market price -- has been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.92 percent, up 0.04 percentage point from the previous week. The rate remained above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. Interest rates were also well below the year-ago level of 5.18 percent.

A modest increase in mortgage rates is to be expected over the next 12 months, Humphries said.

An increase of 50 basis points is likely and perhaps as high as high as 100 basis points due to the cessation of the Federal Reserve's purchases of mortgage-backed securities in the first quarter, he said.

The MBA's seasonally adjusted purchase index USMGPI=ECI, a tentative early indicator of home sales, fell 0.1 percent to 241.2. The seasonally adjusted index of refinancing applications USMGR=ECI increased 0.9 percent to 3,214.0.

The refinance share of mortgage activity increased to 75.2 percent of total applications from 74.4 percent the previous week, the highest share since the week ended April 24. The adjustable-rate mortgage, or ARM, share of activity decreased to 4.1 percent from 4.7 percent of total applications from the previous week, the lowest share since mid-June 2009.

John Walsh, president and founder of Total Mortgage Services, a mortgage banker based in Milford, Connecticut, said loan production at his company is on track to increase to $750 million in 2009 versus $450 million in 2008.

Currently we have seen no slowdown in demand, he said.

We believe this trend will continue into 2010, as rates remain low and both first-time and move-up home buyers take advantage of the available tax credits.

Last month the Obama administration extended the $8,000 first-time buyer tax credit, added a $6,500 provision for move-up buyers and increased income limits. The eligible borrowers must sign contracts by April 30 and close loans by June 30, 2010.

The MBA said fixed 15-year mortgage rates averaged 4.33 percent, unchanged from the previous week. Rates on one-year ARMs decreased to 6.52 percent from 6.55 percent. (Editing by Leslie Adler)