Applications for U.S. home mortgages increased last week boosted by record setting purchasing and surging refinancing activity even as mortgage rates rose, the Mortgage Bankers Association (search) said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 17.4 to 887.0, adding to the previous week's 6.5 percent gain.

"Although the Fed has continued to boost short term rates, long-term rates remain at historic lows, pushing home sales to record levels and creating new opportunities for refinancing," said Bob Walters, chief economist at Quicken Loans, the nation's largest online lender, per rankings compiled by National Mortgage News (search).

"Many consumers have taken advantage of the opportunity to refinance out of short term adjustable rate mortgages and into low, longer term fixed rate mortgages," he said.

The MBA's seasonally adjusted index of refinancing applications climbed 25.6 percent to 2967.4, after rising 10.3 percent the prior week.

The rise in interest rates caused some borrowers to take advantage of the best opportunity to refinance in 2005, according to Citigroup.

"Unless rates rally again, refinancing activity should subside in the next couple of weeks," the company said in research published Wednesday.

The MBA's purchase index, a gauge of loan requests for home purchases, rose 10.4 percent to 529.3, a record high, after climbing 3.6 percent the previous week.

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," Michael Fratantoni, senior director of single-family research and economics at the MBA, said in a press release.

According to the MBA, fixed 30-year mortgage rates (search) averaged 5.62 percent last week, excluding fees, up 7 basis points from 5.55 percent the previous week. Rates are lower than early April, when the fixed 30-year mortgage was at 5.91 percent.

Interest rates also are much lower than a year ago. The fixed 30-year mortgage rate as of June 11, 2004 was 6.34, according to MBA data.

"No one expected rates to be this low right now and no one can predict how long it will last. Using history as our guide, rates rise faster than they fall," said Quickens' Walters. "Consumers have been wise to lock in now, rather than trying to time the market in hopes rates will drop even further," he said.

The average contract interest rate for 15-year fixed-rate mortgages rose last week, up 5 basis points to 5.18 percent from 5.13 percent a week earlier.

Rates on one-year adjustable-rate mortgages, or ARMs, rose to 4.38 percent from 4.09 percent the prior week.

Applications for ARMs fell to 30.9 percent of total applications from 31.7 percent the previous week, the MBA said.

Refinancings, however, increased as a percentage of all mortgage applications, at 46.4 percent of total applications, from 42.9 percent the previous week.

"This is all temporary as far as refis go and it just goes to show you that consumers are a lot more savvy," Anthony Hsieh, president of LendingTree.com, one of the nation's leading online mortgage lenders.

"The lending industry is a lot more hungry and they are aggressively marketing," he said.

Low mortgage rates have supported the housing sector, generating economic growth in recent years. Industry analysts and economists have said they expect home sales to edge off the record 2004 levels as the Federal Reserve raises interest rates, but there has been little sign that demand has weakened.

Further insight into the strength of the U.S. housing market will emerge via economic data on housing starts, which will emerge on Thursday.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations. It has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.