Refinancing drove total U.S. mortgage applications to an eight-month peak, as loan rates fell to or near record lows, but demand to buy homes sank toward 13-year lows last week, the Mortgage Bankers Association said on Wednesday.

The U.S. housing market continued to deflate after a spring sales spree, fueled by now-expired federal tax credits of up to $8,000, robbed from summer home buying.

The upside is now limited by unemployment stuck near 10 percent, heavy foreclosure supply and pent-up selling from owners just waiting for the right time to put their homes back on the market.

Mortgage refinancing requests jumped 12.6 percent in the week ended June 25 to the highest level since May 2009, as average 30-year mortgage rates slid 0.08 percentage point to 4.67 percent, the industry group said.

The 30-year loan rate flirted with the record low of 4.61 percent set in March 2009, according to the MBA's records dating back to 1990, while the 4.06 percent 15-year rate was an all-time lows.

Refinancing drove total mortgage applications up by 8.8 percent, seasonally adjusted, last week. Nearly 77 percent of all loan requests were for a refinancing, the highest share since April 2009.

Still, refi applications were about half the level seen in the spring of 2009 and purchase demand fell for the seventh week out of eight weeks since the tax credit ended, said Michael Fratantoni, MBA's vice president of research and economics.

Many qualified borrowers who could refinance have already taken advantage of low rates when they previously touched current levels. Others are not eligible, either because of credit scores or home values that are well below their current mortgage amounts.

Despite low borrowing costs and home prices average about 30 percent less than their peaks four years ago, applications to buy homes dropped 3.3 percent to hover just above 13-year lows.

Buyers had to sign contracts by April 30 to get the $8,000 first-time purchase credit or $6,500 move-up credit.

Sales of new homes plunged nearly 33 percent in May, however, to the lowest since record keeping began in the early 1960s and existing home sales unexpectedly fell 2.2 percent. A double-dip recession is a growing concern.

We're not out of the woods yet, said James Angel, associate finance professor at Georgetown University's McDonough School of Business in Washington. Rescue scheme after rescue scheme after rescue scheme has been tried, but we still have millions of homeowners facing foreclosure.

Home prices rose in April, but heavy unsold inventory of houses and foreclosure activity will impede a sustained recovery, Standard & Poor's said on Tuesday.

Prices will stay more or less stagnant as excess inventory is worked off for several years, said Angel.

Mortgage