Oct. 7 (Bloomberg) -- Mortgage applications in the U.S. rose last week to the highest level since May as near record- low borrowing costs boosted refinancing and sent purchases to a 10-month high.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan jumped 16 percent to 756.3 in the week ended Oct. 2 from 649.6 in the prior week. The group’s gauge of refinancing surged 18 percent and its measure of purchases climbed 13 percent.

Lower home prices, falling mortgage rates and tax credits to first-time buyers have shored up sales, helping stabilize the housing-market slump that precipitated the financial crisis. Mounting job losses and foreclosures are a reminder that a recovery, in both housing and the economy, will be slow to develop.

“The bottoming process in the housing market is under way,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “Residential investment should serve as a positive contribution to growth” in the third quarter.

The mortgage bankers’ purchase index increased to 306.1 last week, the highest level since January, from 270.4 the previous week, today’s report showed. The refinancing gauge jumped to 3,377.1, the highest level since May, from 2,857.3.

The share of applicants seeking to refinance loans rose to 66.3 percent of total applications last week from 65.3 percent.

Rates Fall

Borrowing costs fell. The average rate on a 30-year fixed- rate loan decreased to 4.89 percent last week from 4.94 percent the prior week. The rate reached 4.61 percent at the end of March, the lowest level since the group’s records began in 1990.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $530, or about $68 less than the same week a year earlier, when the rate was 5.98 percent.

The average rate on a 15-year fixed mortgage fell to 4.32 percent last week from 4.34 percent. The rate on a one-year adjustable mortgage jumped to 6.56 percent from 6.40 percent.

Recent data indicate the housing industry is emerging from its worst recession since the 1930s. The index of signed purchase agreements, or pending home sales, jumped 6.4 percent in August, a seventh consecutive gain, the National Association of Realtors said on Oct. 1.

D.R. Horton Inc., the largest U.S. homebuilder by revenue, is buying finished lots, rather than building on undeveloped land it already owns, to boost its construction pipeline in anticipation of a housing revival.

“There have been some small encouraging signs in our sales and our average sales prices,” Bill W. Wheat, chief financial officer of the Fort Worth, Texas-based company, said on a Sept. 30 call with investors. Even so, foreclosures, job cuts and the expiration of the homebuyer tax credit at the end of November call for a “cautious outlook on the overall housing industry and on our business.”

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week, covers about half of all U.S. retail residential mortgage originations.

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

Last Updated: October 7, 2009 07:00 EDT