Applications for U.S. home mortgages edged higher last week as lower loan rates helped encourage more home purchases for the first time since early August, an industry group said Wednesday.

The seasonally-adjusted index of total mortgage applications including refinancings rose 1.8 percent in the week ended Sept. 1 to 566.3, according to the Mortgage Bankers Association.

The index is at its highest since early July, but is still well below the year-ago level of 771.6, the association said in a statement.

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The improvement coincides with a drop in the rate on standard 30-year mortgages that make up about three-quarters of all U.S. home loans.

Cooler housing markets have "been comparable across the country and that shows (rising) interest rates have been a main factor" since they are the common denominator, said Michael Fratantoni, a senior director of research and economics at the MBA. Expectations that the Federal Reserve will not raise its target interest rate further this year may now help stabilize the market, he said.

The average 30-year fixed mortgage rate was 6.31 percent last week, down 0.08 point since Aug. 25 and off 0.5 point since early July, the MBA said. The savings since July would reduce monthly principal and interest on a $250,000 mortgage by $82 per month and $984 a year.

The component index of home purchases increased 3.7 percent to 389.7, while the gauge of refinancing declined 0.9 percent to 1,594.7, the MBA said. The four-week moving average of the purchase index was up 0.1 percent and 1.2 percent for the refinancing index.

U.S. housing has been in a slump since early 2006 after rising interest rates and declining affordability sapped sales of new and existing homes, analysts said.

Home prices nationwide in the second quarter rose just 1 percent, marking the sharpest deceleration in over three decades, the Office of Housing Enterprise Oversight said on Tuesday.

Long-term interest rates led by the benchmark 10-year Treasury note have plunged over the past two months amid expectations that slowing economic growth would curb upward momentum in inflation.

Expectations that the Fed will leave its short-term interest rate unchanged at 5.25 percent at its meeting this month are contributing to lower rates, analysts said.

Falling sales have translated into a surge of inventories of homes on the market. The National Association of Realtors in August reported housing inventories rose 40 percent from a year earlier to a 7.3 month supply at the current sales pace.

The realtors' index of pending home sales on Friday showed activity continued to ease in August, though NAR economist David Lereah said he expected the decline would "flatten" in coming months based on favorable interest rates and continued economic growth.

Lower 30-year fixed-rates are driving a greater percentages of mortgages, the MBA reported. The amount of loans with fixed rates increased to 73.8 percent of mortgages last week, the highest since October 2003.

The rate on a one-year adjustable mortgage was 5.91 percent last week, giving borrowers only a 0.4 percentage point in savings in exchange for taking on risk of rising rates. That savings incentive was 0.74 point at the end of 2005.

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