A new home sits for sale in Lemont, Illinois, July 27, 2009. REUTERS/John Gress

NEW YORK - U.S. mortgage applications jumped last week to their highest since late May as interest rates tumbled below 5 percent, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Sept 18 increased 12.8 percent to 668.5, the highest level since the week ended May 22.

While consumers clamored for home refinancing loans, their appetite for applications to buy a home, a tentative early indicator of sales, was also robust. The overall trend bodes well for the hard-hit U.S. housing market, which has been showing signs of stabilization.

Eric Belsky, executive director at Harvard University's Joint Center for Housing Studies, said several months of improvement in new and existing home sales is a positive sign.

Low interest rates on mortgages are important to the fledging housing recovery, he said.

This has made a significant impact on the affordability front and where they may be headed could be key to a sustained recovery, he said.

While an uptick may bring buyers anxious that rates will keep rising into the market temporarily, a material increase in rates could threaten the rebound.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.97 percent, down 0.11 percentage point from the previous week. It was the first time since the week ended May 22 that the rate on this most widely used home loan was below 5 percent.

However, 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. Nevertheless, interest rates were well below year-ago levels of 6.08 percent.

Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers -- part of the stimulus bill -- have helped stabilize the market.

But with the tax credit set to end November 30 and distressed properties making up a high proportion of sales, the flurry of activity masks uncertainty about the long-term outlook.

The MBA's seasonally adjusted purchase index rose 5.6 percent to 288.3, driven by applications for government-insured loans. Indeed, the government purchase index was at the highest level ever recorded in the survey and the share of purchase applications that were government-insured was 45.7 percent, the highest share since November 1990, the MBA said.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.3 percent.


The Mortgage Bankers seasonally adjusted index of refinancing applications increased 17.4 percent to 2,881.5, with the index at its highest since the week ended May 29.

The refinance share of applications increased to 63.8 percent from 61.0 percent the previous week, but remained significantly lower than the peak of 85.3 percent in the week to January 9. The adjustable-rate mortgage share of activity increased to 6.7 percent, up from 6.0 percent the prior week.

The U.S. housing market has suffered the worst downturn since the Great Depression of the 1930s and its impact has rippled through the recession-hit economy, as well as the rest of the world.

The housing market, however, has been showing signs of stabilization, with sales rising and home price declines moderating in many regions of the country. In fact, home prices in some areas have risen.

Some analysts, however, say prices may fall again, with a new wave of foreclosures in the pipeline.

Fixed 15-year mortgage rates averaged 4.41 percent, unchanged from the previous week. Rates on one-year ARMs edged down to 6.52 percent from 6.61 percent.