Mortgage applications fell from a six-month peak last week as the lowest interest rates in over a year failed to foster demand for refinancing or home purchase loans.

Interest rates on 30-year fixed-rate mortgages, the most widely used loan, reached their lowest level since mid-May 2009, the Mortgage Bankers Association said on Wednesday.

While low rates and high affordability helped the housing market gain ground over the past year, the sector has struggled since popular home buyer tax credits expired on April 30.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 18, decreased 5.9 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 0.5 percent.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 1.2 percent, the sixth drop in seven weeks and not far from a 13-year low set two weeks earlier.

Demand is down nearly 39 percent since the tax credit expired.

Weak home purchase loan demand indicates a rough ride is ahead for home sales, said Cameron Findlay, chief economist at LendingTree.com in Charlotte, North Carolina.

The housing market remains highly vulnerable to setbacks, with a flood of foreclosures in the pipeline and unemployment stubbornly high at 9.7 percent, he said.

We will not see a sustained improvement in housing until we get to a sub-9 percent unemployment rate, which I do not see happening until the third quarter of 2011, he said.

The MBA's seasonally adjusted index of refinancing applications decreased 7.3 percent.

Eligibility for home buyer tax credits required buyers to sign purchase contracts by April 30, with sales required to close by June 30. There is currently a push in Congress to extend the contract settlement to September 30.

Expectations that the tax credits front-loaded home sales is being borne out by data giving a glimpse into just how much was siphoned from future sales.

Sales of previously owned U.S. homes unexpectedly fell last month, the National Association of Realtors said on Tuesday.

The Commerce Department on Wednesday will release May data on new home sales.

With tax incentives no longer playing a role, home sales will have to find a level supported only by underlying fundamental factors, which remain weak. Lending standards are tight and many homeowners are underwater, meaning their homes are worth less than what they owe on their mortgages.

Meanwhile, the MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.75 percent, down 0.07 percentage point from the previous week and the lowest level since the week ended May 15, 2009.

Interest rates were also below their year-ago level of 5.44 percent. An all-time low of 4.61 percent was set in the week ended March 27, 2009, based on a survey that has been conducted weekly since 1990.

The MBA said fixed 15-year mortgage rates averaged 4.19 percent, down from 4.23 percent the previous week. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 7.05 percent from 7.07 percent.

(Editing by Leslie Adler)

Mortgage Fall