Jan. 9 (Bloomberg) -- Mortgage applications in the U.S. jumped last week, led by a surge in refinancing as long-term interest rates fell to the lowest level in two years.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan rose 32 percent, the biggest gain since January 2001, to 706.0. Refinancing surged 54 percent and purchases climbed 14 percent.

Fixed-mortgage rates dropped even as borrowing costs on adjustable-rate loans rose last week, giving owners facing resets an incentive to refinance. The collapse in subprime lending has also made getting a loan more difficult, suggesting people will apply at several banks to improve their chances.

``Potential home buyers and refinancers are submitting multiple applications in order to secure financing because of the turmoil in the mortgage markets,'' Steven Wood, president of Insight Economics in Danville, California, said before the report.

The figures have in the past also been volatile during this time of year because the holidays make it difficult to adjust the data for seasonal variations, economists said. The index rose 17 percent in the first week of 2007 and 9.9 percent in the first week of 2006.

``These numbers can be a little misleading at the end of the year,'' Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report.

The refinancing index rebounded to 2494.2, reversing losses incurred over the previous three weeks. The mortgage bankers' purchase index increased to 414, also the first increase in three weeks.

Lower Rates

Still, applications may have received a lift from falling interest rates. The average rate on a 30-year fixed loan dropped to 5.73 percent, the lowest since September 2005, from 6.05 the prior week, today's report showed.

At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $582.3, compared with $642.63 as recently as July, when the rate was at 6.66 percent.

The average rate on a 15-year fixed mortgage fell to 5.21 percent from 5.61 percent, while the rate on a one-year adjustable mortgage increased to 6.04 percent from 6.00 percent.

Applications to refinance loans increased to 57.5 percent of volume, compared with 50.9 percent the prior week.

Figures last month showed sales continued to weaken. Total purchases of new and existing homes in November fell 0.8 percent to a 5.65 million annual pace, the lowest since comparable records began in 1999.

Construction Cutbacks

With sales falling, builders are cutting back on projects, pushing home construction down 48 percent in November from a January 2006 peak. Residential building has detracted from growth every quarter since then and is likely to continue to hurt the expansion well into 2008, economists say.

The applications survey only includes retail lenders, which have increased their share of total business as many wholesale brokers closed their doors following the subprime turmoil. Also, the report counts all applications, even those that are ultimately rejected.

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: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: January 9, 2008 08:11 EST