June 13 (Bloomberg) -- Mortgage applications in the U.S. rebounded last week as home purchases surged to a five-month high and refinancing increased.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan rose 6.6 percent, the most in three months, to 666.5 from 625.3 the prior week. The group's gauge of purchase applications jumped 7.2 percent, and a measure of refinancing gained 5.6 percent.

The biggest jump in fixed-mortgage rates in three years may have lured some buyers into the market to take advantage of lower home prices before rates go up even more. Increasing jobs and wages are given owners the wherewithal to buy, signaling housing may be less of a restraint on the economy.

``Housing demand is in the process of stabilizing,'' said Robert Stein, a senior economist at First Trust Advisors LP in Lisle, Illinois. ``We have substantial employment growth that'll support the ability to make purchases. The drag from housing is coming down.''

The mortgage bankers' purchase index rose to 464.7 last week, the highest since January, from 433.6 the previous week. The purchase measure is 12 percent higher than a year earlier.

The refinancing index increased to 1854.8 last week from 1757.1 the prior week, and is 23 percent above the year-earlier level. The share of applications for refinancing held at 38 percent last week. Adjustable-rate mortgages rose to 18.7 percent of all applications, from 17.8 percent the prior week.

Rates Jump

Today's report showed the average rate on a 30-year fixed mortgage increased to 6.61 percent last week, the highest since the week ended July 28. The 0.26 percentage point increase from the prior week was the biggest since April 2004.

At last week's 30-year fixed rate, monthly borrowing costs for each $100,000 of a loan would have been about $639, the same as a year ago.

Subprime mortgage borrowers, or people with patchy or poor credit histories, may be slowing the housing recovery as they fall behind in payments or default on loans. Still, the problem isn't spilling over into the rest of the market, and the worst of the housing slowdown is probably over, policy makers have said.

``We're pretty close to a bottom in terms of demand, but there are some risks to that outlook,'' Federal Reserve Bank of Richmond President Jeffrey Lacker said last week..

Homebuilders are yet to see an improvement. Elliott Building Group Ltd., a Pennsylvania homebuilder, entered bankruptcy reorganization this week.

`Challenging' Environment

For chains such as Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, profit gains are harder to come by. The company last week reported that earnings last quarter fell short of its forecast.

``The overall retailing environment, especially sales of merchandise related to the home, has been challenging,'' Chief Executive Officer Steven H. Temares said last week.

Today's mortgage bankers' data showed the average rate on a 15-year fixed mortgage increased to 6.28 percent last week, from 6.13 percent the prior week. The one-year adjustable mortgage rate declined to 5.48 percent from 5.74 percent.

The Mortgage Bankers Association's survey, compiled every week since 1990, 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: June 13, 2007 07:00 EDT