Aug. 8 (Bloomberg) -- Mortgage applications in the U.S. rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan jumped 8.1 percent to 656.5 from 607.1 the prior week. A gauge of demand for credit for home purchases rose 7.4 percent, and the average rate on a 30-year fixed mortgage fell for the fourth consecutive week, the group said today.

A resilient labor market and lower home prices may support sales and eventually help reduce the glut of unsold properties, economists said. A report last week showed Americans signed more contracts to buy previously owned homes in June.

``The sharp weakness in home sales and housing starts experienced in 2006 and so far in 2007 should ease,'' said Steven Wood, president of Insight Economics LLC in Danville, California. Still, ``no significant rebound is in sight. Home construction is unlikely to be a positive for economic growth until early next year at the earliest.''

A separate report from the Commerce Department today showed that sales at U.S. wholesalers rose faster than inventories in June, making it likely companies will continue to rebuild stocks. Wholesaler stockpiles increased 0.5 percent, more than anticipated by economists.

Declining Rates

The mortgage rate for 30-year fixed loans fell to the lowest since early June, while rates also dropped for 15-year fixed and one-year adjustable loans.

The mortgage bankers' purchase index rose to 447.4 last week, the first increase in a month, from 416.6 the previous week, today's report showed. The refinancing index increased 9.1 percent to 1881.1 last week, the highest in more than two months, from 1724.1. Both measures were higher than a year earlier.

The share of applications for refinancing rose to 39.9 percent from 39.4 percent the prior week. Adjustable-rate mortgages rose to 22.5 percent of all filings from 22.3 percent.

Purchase applications may be elevated because borrowers who had previously been rejected are reapplying for loans, and some consumers are applying to several lenders in hopes of getting approved by at least one, economists have said.

The average rate on a 30-year fixed mortgage fell to 6.41 percent last week, from 6.50 percent the prior week, the report showed. At last week's rate, monthly borrowing costs for each $100,000 of a loan would have been about $626, or $3 less than a year earlier.

Rising Defaults

Rising defaults by those with poor or limited credit history are throwing more homes back on the market, which means the housing slump will persist into 2008, some economists said.

American Home Mortgage Investment Corp. filed for bankruptcy this week, becoming the second-biggest residential lender in the U.S. to close down this year. Melville, New York-based American Home specialized in mortgages for people who fall just short of top credit scores.

Mortgage defaults will rise for at least a year, spreading beyond subprime borrowers to those with better credit, Friedman Billings Ramsey Group Inc., a real estate investment trust, forecast this week. Subprime defaults are already the highest in a decade, the Arlington, Virginia-based company said.

Federal Reserve

Federal Reserve policy makers yesterday held their interest- rate target at 5.25 percent for a ninth time and maintained that inflation is the biggest risk for the economy.

They also acknowledged that persistent declines in housing, stricter lending standards and volatile financial markets have raised concerns about growth ``somewhat,'' according to their statement. Still, they projected the economy would continue to expand.

Today's mortgage bankers' data showed the average rate on a 15-year fixed mortgage decreased to 6.16 percent last week, from 6.20 percent the prior week. The one-year adjustable mortgage rate fell to 5.69 percent from 5.73 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: August 8, 2007 17:55 EDT