June 3 (Bloomberg) -- Mortgage applications in the U.S. dropped last week as the biggest jump in mortgage rates in seven months pushed down refinancing.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 16 percent to 658.7 in the week ended May 29, from 786 the week before. The group’s refinancing gauge plunged 24 percent, while the purchase measure increased 4.3 percent.

An improving economic outlook in recent weeks has pushed up borrowing costs and caused homeowners to shy away from refinancing. At the same time, prices are still declining and borrowing costs are below year-earlier levels, making housing more affordable to some prospective buyers and helping to stabilize the market.

“This increase in rates would hit refinancing given they seem to be quite responsive to mortgage rates,” Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York, said before the report. “Home sales look to be relatively stable. They’ve already reached a trough earlier in the year, but they haven’t picked up just yet.”

The mortgage bankers’ refinancing gauge decreased to 2,953.6, the lowest level since February, from 3,890.4 the previous week. The purchase index rose to 267.7, a two-month high, from 256.6.

The share of applicants seeking to refinance loans fell to 62.4 percent of total applications from 69.3 percent.

Rates Jump

The average rate on a 30-year fixed-rate loan rose to 5.25 percent, the highest level since January, from 4.81 percent the prior week. The increase was the biggest since October.

The rate reached 4.61 percent in late March, the lowest level since the mortgage bankers group began records in 1990.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $552. That is about $59 less than the same week a year earlier, when the rate was 6.17 percent.

The average rate on a 15-year fixed mortgage rose to 4.80 percent from 4.44 percent the prior week. The rate on a one-year adjustable mortgage increased to 6.61 percent from 6.55 percent.

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

A report from the National Association of Realtors yesterday showed the number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, the biggest gain in more than seven years.

Signed Contracts

The Realtors group said gains in pending sales have been larger than actual home resales in recent months because distressed properties are taking longer to close since they require lender approval. Also, some of the pending contracts fall through before a transaction is completed, chief economist Lawrence Yun said yesterday.

“Business could be a whole lot better,” James Gillespie, chief executive officer of Coldwell Banker Real Estate LLC said in an interview yesterday. While first-time buyers are taking advantage of foreclosure-driven price decreases, the market for those trying to sell one home and buy a bigger property is still weak, he said.

Coldwell Banker is lobbying Congress for a $15,000 tax credit for all homebuyers, rather than the $8,000 credit provided to first-time purchasers by the Obama administration’s stimulus plan.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: June 3, 2009 07:00 EDT