March 18 (Bloomberg) -- Mortgage applications in the U.S. increased last week as lower borrowing costs led to a surge in refinancing.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose 21 percent to 876.9 in the week ended March 13, the highest in two months, from 723.4 the prior week. The group’s refinancing gauge jumped 30 percent and its purchase index gained 1.5 percent.

The lowest interest rates on record are enticing homeowners looking to lower their mortgage payments as the labor market deteriorates. Still, mounting foreclosures are pushing down property values, further depressing household wealth.

“Homeowners continue to attempt to repair their balance sheets and weather the economic downturn,” said Steven Wood, president of Insight Economics LLC in Danville, California. “The trend toward lower interest rates is providing some modest help to the economy, even if it is difficult to see.”

The mortgage bankers’ purchase index increased to 257.1 last week from 253.3 a week earlier. The index reached an eight- year low of 235.9 in the first week of February. The refinancing gauge rose to 4497.6, the highest in two months, from 3470.7.

The average rate on a 30-year fixed-rate loan dropped to 4.89 percent, matching the record low reached in early January, from 4.96 percent the prior week, the report showed. The group’s data goes back to 1990.

Lower Rates

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be about $530, or $93 less than a year ago, when the rate was 6.36 percent.

Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 4.52 percent, the lowest since June 2003, from 4.54 percent the prior week, while the rate on a one- year adjustable mortgage slid to 6.20 percent from 6.21 percent.

The share of applicants seeking to refinance loans jumped to 72.9 percent of total applications last week from 67.9 percent.

Fannie Mae today said its refinancing volume surged to about $41 billion last month, the highest in almost a year, from approximately $13.7 billion in January.

“We anticipate that volumes will increase even more as millions of additional homeowners become eligible to refinance” as part of the Obama administration’s efforts to protect borrowers and revive the housing market, Tom Lund, executive vice president for the company’s single-family mortgage business, said in a statement.

Obama Plan

President Barack Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes and stem the rise of foreclosures. His measures also include a tax break of as much as $8,000 for first-time homebuyers that wouldn’t require repayment.

Housing starts in February unexpectedly snapped the longest streak of declines in 18 years, figures from the Commerce Department showed yesterday. The rebound pushed up builder shares, led by gains at Toll Brothers Inc., the nation’s largest developer of luxury homes, and Pulte Homes Inc., the largest homebuilder.

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

Last Updated: March 18, 2009 12:21 EDT