May 10 (Bloomberg) -- Mortgage applications in the U.S. fell last week by the most since February as higher borrowing costs slowed purchases and pushed refinancing to its lowest level this year.

The Mortgage Bankers Association's index of applications to buy a home or refinance an existing loan declined 5.8 percent to 562.1 from 596.8. The group's refinancing index fell 8.8 percent last week to 1427.4, the lowest since the week ended Dec. 23, from 1565.6.

The average rate on a 30-year fixed mortgage increased to 6.61 percent, the highest since June 2002. The five-year boom in housing will come to an end and weigh on the economy this year, economists forecast. Higher mortgage rates are slowing sales and refinancing, removing a source of cash for consumers.

``If mortgage rates continue to rise, then housing-related activity will drop further and eventually begin to subtract from economic growth,'' said Steven Wood, president of Insight Economics LLC in Danville, California.

Federal Reserve policy makers, who are expected to raise interest rates today at their third meeting this year, hope to slow the economy enough to ensure inflation will remain in check. The Fed's 15 straight increases since June 2004 have boosted rates on credit cards, auto loans, mortgages and home- equity lines of credit.

Fed Chairman Ben S. Bernanke, in testimony to Congress on April 27, said a slowdown in housing ``could prove a drag on growth this year and next.''

Mortgage Rates

The average rate on a 30-year fixed mortgage rose from 6.57 percent a week earlier. At last week's average rate, the monthly principal and interest costs for each $100,000 of a loan would be $639. A year ago, when the average rate was 5.77 percent, the payment was $585.

``The cost of credit is moving up,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Home prices have increased so much it is scaring people away. There's sticker shock.''

The average rate on a 15-year fixed mortgage increased to 6.2 percent last week from 6.19 percent. The average one-year adjustable-rate mortgage dropped to 6.04 percent from 6.08 percent a week earlier.

The decline last week in the mortgage bankers index of purchase and refinancing applications was the largest since a 7.3 percent decrease in the week ended Feb. 10. The group's gauge of purchases dropped 3.9 percent to 416.5 last week from 433.3.

The gauge of mortgage applications has fallen 28 percent from a year ago. The purchase index has declined by 21 percent, and refinancing has plunged by 37 percent over the same period.

Refinancing Share Falls

Refinancing's share of loan applications fell to 33.8 percent last week from 35.2 percent.

The Mortgage Bankers Association's survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

Growth in real estate contributed more than half of the U.S. economy's expansion since 2001, according to Merrill Lynch estimates. The economy expanded in the first quarter at an annual pace of 4.8 percent, the fastest in more than two years. The pace of growth will slow to 3 percent by yearend, the National Association for Business Economics said on May 8.

``Coming off a prolonged period of record sales, housing is taking something of a breather this year,'' David Lereah, chief economist for the National Association of Realtors, said in a statement yesterday. Home sales will be at ``healthy levels'' in 2006, though ``below the peaks experienced during the last two years.''

Forecasts

Purchases of previously owned homes may fall 6.4 percent to 6.62 million in 2006, and new-home sales are likely to drop 11.6 percent to 1.13 million from last year's record of 1.28 million, according to the National Association of Realtors.

Toll Brothers Inc., the largest U.S. builder of luxury houses, trimmed its 2006 sales forecast on May 5, the third reduction in its expectations since November.

Even so, the labor market is strong and long-term interest rates are still close to historic lows, which will help keep housing from slumping, economists said.

``You wouldn't want to totally write off housing yet,'' Rupkey said.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: May 10, 2006 10:33 EDT