U.S. mortgage applications fell last week as a drop in home refinancing volume outweighed the highest demand for home purchase loans in six months, data from an industry group showed on Wednesday.

A modest rise in mortgage rates weighed on demand for home refinancing loans, while the imminent expiration of federal home buyer tax credits likely drove consumers to lock in rates, which remain historically low and are widely expected to move higher as the economy recovers.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 2.9 percent for the week ended April 23.

The four-week moving average of mortgage applications, which smooths volatile weekly figures, was down 3.1 percent.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, increased 7.4 percent to its highest level since the week ended October 16.

The MBA's seasonally adjusted index of refinancing applications decreased 8.8 percent.

Purchase activity continues to increase as we approach the end of the homebuyer tax credit program, Michael Fratantoni, MBA's vice president of research and economics, said in a statement.

Purchase applications were up almost 9 percent from a month ago, with a disproportionate share of the increase due to government purchase applications. Government applications for purchasing a home accounted for almost 49 percent of all purchase applications last week, he said.

To qualify for tax credits of $8,000 for first-time home buyers and $6,500 for home owners buying a new residence, eligible borrowers must sign contracts by April 30 and close loans by June 30.

Recent data on sales of new and existing home sales indicate a strong benefit from the tax credits. Government data showed sales of new U.S. single-family homes touched their highest level in eight months in March, while industry data showed sales of previously owned homes also gained in March.

James Mallozzi, chairman and chief executive officer of Prudential Real Estate and Relocation Services, said while home buyer tax credits have helped both first-time home buyers and the U.S. housing market overall, their expiration should not deter home purchasing activity.

Everybody wants to give credit to the tax credits, which undoubtedly boosted home sales, but consumers are also more confident about the market and where home prices are headed, said Mallozzi, who is based in Irvine, California.

When it comes to home sales, the absolute level of home prices ranks first in importance, the level of mortgage rates ranks second, while the home buyer tax credits ranks a distant third, he said.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.08 percent, up 0.04 percentage point from the previous week and above the year-ago level of 4.62 percent.

Mortgage rates could head toward 5.50 percent or 6 percent later this year, Mallozzi said.

This could dampen demand and I foresee a slow housing recovery, he said.

The MBA said fixed 15-year mortgage rates averaged 4.38 percent, up from 4.34 percent the previous week. Rates on one-year adjustable-rate mortgages, or ARMs, increased to 7.03 percent from 6.95 percent.