U.S. mortgage applications for home purchasing and refinancing increased last week as interest rates hit a new low, a glimmer of hope for a housing market that has failed to find footing in the absence of government support.

Demand for home loan refinancing rose for a fifth straight week, a development that may provide a much-needed jolt to a flailing economy as it could portend an increase in consumer spending.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended August 27 increased 2.7 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 5.2 percent.

The MBA's seasonally adjusted index of refinancing applications increased 2.8 percent, reaching the highest level since the week ended May 1, 2009.

Home loan refinancing puts extra cash into consumers' hands that they can save, use to pay off existing debt or funnel into the economy through extra spending.

Refinancing activity picked up again last week, reaching new 15-month highs, as borrowers took advantage of even lower mortgage rates, Michael Fratantoni, MBA's Vice President of Research and Economics, said in a statement.

The drop in mortgage rates was in line with Treasury rates as the latest data continue to show weak economic growth and an exceptionally weak housing market, he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.43 percent, down 0.12 percentage point from the previous week. That is a lowest level in the survey, which has been conducted weekly since 1990.

Interest rates were also below their year-ago level of 5.15 percent.

Michelle Meyer, senior U.S. economist at BofA Merrill Lynch in New York, said the rise in demand for home loan refinancing is a small positive for the economy, but activity remains muted.

Given how low mortgage rates have fallen, the number of borrowers seeking to refinance has been disappointing, she said. A large amount of borrowers have an incentive to refinance, but they may have lost their jobs or the closing costs are too high.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

Home sales have tumbled in recent months and home prices are expected to trek downward again amid a glut of homes up for sale and mounting foreclosures.

The volatile bottoming in the housing market will persist for some time, creating a painful U-shaped recovery, Meyer said. Housing construction is at a very depressed level, so I do not see much more downside, but any recovery will be sluggish.

Demand for home purchase loans has been tepid, but it nevertheless rose for a second straight week. The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, increased 1.8 percent.

Ed Mulderrig, partner of Mulderrig Builders in Southampton, New York, said a large majority of sales lately are below $1 million.

This is probably due to the people who bought, hoping to ride the boom and sell, but do not have the financial backing to hold for extended periods, he said. Refinancing is not possible because even though mortgage rates are historically low, the banks are extremely strict with their requirements.

Higher end homes are not selling as fast because the people still believe their homes are worth close to 2006 prices and most of them have the means to hold until an improvement in prices, he said.

The MBA said fixed 15-year mortgage rates averaged 3.88 percent, down from the previous week's 3.91 percent, a record low. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 6.95 percent from 6.84 percent.

Mortgage