Mortgage applications fell for a third consecutive week last week as interest rates on 30-year home loans climbed to the highest levels since late March, an industry trade group said Wednesday.

The Mortgage Bankers Association (search) said its index of mortgage applications for the week ended Oct. 7 slid 2.6 percent to 694.8 -- the lowest since mid-April.

Borrowing costs on 30-year fixed-rate mortgages (search), excluding fees, averaged 5.98 percent last week, up 0.04 percentage point from 5.94 percent the prior week. The average 30-year rate touched the highest level since the week ended March 25, when it hit 6.08 percent, the highest this year.

A year ago, the average 30-year rate was 5.69 percent. During 2005, the industry benchmark has climbed on and off from a low of 5.47 percent in late June.

"What we are seeing is not illogical given rates are creeping up," said Jim Svinth, executive vice-president of capital markets for LendingTree.com, an online facilitator that matches consumers with lenders competing for their business. "The deficit, inflationary expectations and the war in Iraq. All of those things point to generally higher rates."

The MBA's purchase mortgage index fell 0.9 percent to 469.5 from the prior week's 473.8. The index, considered a timely gauge on U.S. home sales, declined for a fourth consecutive week to its lowest level since May 27.

The group's index of refinancing applications fell 4.9 percent to 2,004.9, compared with 2,107.4 for the previous week.

The indexes were all seasonally adjusted, the MBA said.

Fixed 15-year mortgage rates (search) last week averaged 5.55 percent, unchanged from the previous week. Rates on one-year adjustable-rate mortgages (search), or ARMs, increased to 5.26 percent from 5.13 percent.

Svinth, who is based in Southern California, believes the U.S. housing market is still strong, given there is more demand than there is supply.

"I probably could not argue for it (the housing market) being as robust as it has been for the last three years, but if you look over a 40-50 year horizon from a historical perspective, it is still a good market and it is still a very good borrowing market." he said.

With ARMs, low initial payments have allowed borrowers to buy homes they may not have been able to afford with fixed-rate loans.

Last week the percentage difference between the average 30-year fixed-rate mortgage and one-year ARMs decreased to the lowest spread since March 9, 2001, the MBA said.

The ARM share of activity decreased to 29.5 percent of total applications from 29.8 percent the previous week. ARM demand reached a 2005 high of 36.6 percent in late March.

Refinancings also decreased as a percentage of all mortgage applications, falling to 43.5 percent from 44.5 percent, the MBA said.

The group's survey covers about 50 percent of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts.