U.S. mortgage applications rose for the first time in three weeks as interest rates on home loans fell from a four-year high during a week when the Federal Reserve raised borrowing costs, an industry trade group said on Thursday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended June 30 increased 5.9 percent to 561.0 from the previous week's 529.6.

Last Thursday, the policy-setting Federal Open Market Committee raised its federal funds rate by a quarter-percentage point to 5.25 percent, as expected. It was the central bank's 17th straight hike since June 2004.

While mortgage rates are linked to long-term U.S. Treasury yields, higher short-term rates lead investors to recalibrate their long-term rate expectations.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.80 percent, down 0.06 percentage point from the previous week, which was its highest since April 12, 2002 when it reached 6.92 percent.

The MBA's seasonally adjusted purchase mortgage index rose 6.5 percent to 414.2.

The purchase index, which is considered a timely gauge of U.S. home sales, is considered a timely gauge of U.S. home sales, was substantially below its year-ago level of 520.8.

The group's seasonally adjusted index of refinancing applications increased 5.0 percent to 1,423.9. A year earlier the index stood at 2,788.2.

The refinance share of applications decreased to 35.0 percent from 35.3 percent the previous week.

Fixed 15-year mortgage rates averaged 6.41 percent, down 6.49 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) increased to 6.39 percent from 6.36 percent.

The ARM share of activity increased to 29.5 percent of total applications from 29.1 percent the previous week.

Historically low mortgage rates have fueled a five-year housing boom, helping support the U.S. economy's recovery from recession despite uncertain business investment.

While analysts differ on whether or not there is a housing bubble, most agree that the market is cooling off from its record run.

The MBA's survey covers about 50 percent of all U.S. retail residential mortgage loans. Respondents include mortgage bankers, commercial banks and thrifts.

Mortgage