U.S. mortgage applications rose sharply last week, fueled by a surge in demand for home refinancing loans, as interest rates sank to their lowest in more than a year, an industry trade group said on Wednesday.

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The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, including refinancing and purchasing loans, rose 8.1 percent to 647.6 in the week to December 1 from the previous week's 599.

Applications were 1.4 percent below their year-ago level.

Dean Maki, chief U.S. economist at Barclays Capital in New York, said the indexes tend to be volatile but lower rates have enticed consumers, which will benefit the U.S. housing market.

"The decline in mortgage rates and the slowing in home price appreciation, along with the buildup in inventories, has led to a much better situation for home buyers through increased affordability as well as more inventory to choose from," he said. "Households are saying on surveys that home buying conditions have improved notably and that has coincided with the stabilization in home sales."

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.98 percent, down 0.15 percentage point from the previous week, the lowest since the week ended October 7, 2005, when it stood at the same level. Interest rates were also below year-ago levels of 6.32 percent.

Fueling the rise last week was a 13.7 percent jump in the MBA's seasonally adjusted index of refinancing applications to 1,989.7, up 24.6 percent from a year ago when the index stood at 1,596.4.

The refinance share of requests rose to 50.1 percent from 46.9 percent the week before, its highest since April 2004.

Demand for home purchase loans was also robust.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of U.S. home sales, rose 4.9 percent to 426.6, its highest since May. However, the purchase index was substantially below its year-ago level of 495.1, a drop of 13.8 percent.

The indexes also point to stabilization, with the sharp weakness in home sales and housing starts seen so far this year expected to ease in the coming months, analysts say.

While mortgage lenders certainly benefited from the increase in demand for home loans last week, U.S. home builders are not faring as well and are feeling the pinch of the slowdown in the country's once-soaring real estate market.

"Housing construction is extremely weak at present and is currently shaving more than a percentage point from gross domestic product growth," said Maki. "Home sales, on the other hand, appear to be stabilizing."

FAREWELL TO ARMs

The gap between some fixed- and floating-rate loan rates is slim. Fixed 15-year mortgage rates averaged 5.66 percent, down from 5.86 percent, its lowest since January. Rates on one-year adjustable-rate mortgages decreased to 5.79 percent from 5.87 percent, its lowest since March.

The narrowing gap between these two types of loans has been luring consumers to fixed-rate loans and away from ARMs.

The ARM share of activity decreased to 23.9 percent of total applications from 24.5 percent the previous week, its lowest since October 2003.

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

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