June 18 (Bloomberg) -- Mortgage applications in the U.S. declined last week, led by a slump in refinancing as borrowing costs surged.

The Mortgage Bankers Association's index of applications to purchase a home or refinance a loan fell 8.8 percent to 507.9 from 557.1 the prior week. The index reached a six-year low of 502.3 last month. The group's purchase index decreased 4.4 percent and its refinancing gauge lost 15 percent.

Prospective buyers are holding off as rising foreclosures add to the glut of properties on the market and force home values down even more. Sales will probably remain depressed as lenders restrict credit, and concern over inflation boosts mortgage rates.

``The increase in mortgage rates is decidedly negative for the housing outlook,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``Higher rates strain affordability, suggesting home prices may have to fall further to provide an offset.''

The MBA purchase index fell to 359.6 from 376.2 the prior week.

The refinancing gauge decreased to 1378.6, the lowest level since July 2006, from 1622.1. The share of applications for refinancing fell to 37.4 percent from 39.8 percent the prior week.

The highest mortgage rates in a year may have precipitated the slump in demand.

Rates Jump

The average rate on a 30-year fixed-rate loan rose to 6.57, the highest level since June 2007, from 6.24 percent. At the current rate, monthly borrowing costs for each $100,000 of a loan would be $637, up $69 from the year's low reached in January.

The average rate on a 15-year fixed mortgage increased to 6.14 percent from 5.78 percent, while the rate on a one-year adjustable mortgage jumped to 7.22 percent, the highest level since December 2000, from 6.87 percent.

The Mortgage Bankers Association this month reported that the number of Americans in danger of losing their homes to foreclosure rose to the highest in at least three decades during the first quarter as borrowers who fell behind on payments were unable to sell their homes.

As home prices fall, more and more homeowners are unable to refinance out of adjustable-rate loans and are forced into foreclosure.

The share of applicants seeking variable-rate loans fell to 9.7 percent last week from 10.3 percent a week earlier. The figure reached a 17-year low of 3.8 percent in March.

Less Construction

Builders in the U.S. broke ground in May on the fewest houses in 17 years, the Commerce Department said yesterday in Washington. Building permits, an indicator of future construction, also fell.

Homebuilders are feeling the crunch. Irvine, California- based Standard Pacific Corp. this week said new-home orders for April and May fell 12 percent from a year earlier.

``Our absolute sales absorption rates continue to reflect the difficult housing conditions in most of our markets,'' the company said in a statement. Standard Pacific operates in eight states, including Arizona, California and Nevada, which posted the highest foreclosure rates in the U.S. in May, according to RealtyTrac Inc.

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

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: June 18, 2008 08:25 EDT