Mortgage applications rose for the first time in three weeks as interest rates fell sharply and demand surged for home purchase and refinance loans, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended August 3 rose 8.1 percent to 656.5, its highest level since early June.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.41 percent, down 0.09 percentage point from the previous week. Interest rates were below year-ago levels at 6.45 percent.

The MBA's seasonally adjusted purchase index rose 7.4 percent to 447.4. The index was also above its year-earlier level of 388.9. The purchase index is considered a timely gauge of U.S. home sales.

The group's seasonally adjusted index of refinancing applications soared 9.1 percent to 1,881.1.