U.S. mortgage applications to refinance home loans jumped to a seven month high last week as rates neared record lows, but purchase demand remained stuck at a 13-year low.

Interest rates on 30-year fixed-rate mortgages, the most widely used loan, reached their lowest level since late-November 2009, the Mortgage Bankers Association said on Wednesday. Low mortgage rates may prove to be the saving grace for the housing market as it copes with the expiration of popular home buyer tax credits.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 21, increased 11.3 percent.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 4.4 percent.

Refinance application volume jumped last week as continuing financial market turmoil related to the budget crises in Europe extended the opportunity for homeowners to lock in at historically low mortgage rates, Michael Fratantoni, MBA's Vice President of Research and Economics, said in a statement.

The MBA's seasonally adjusted index of refinancing applications increased 17.0 percent, its third straight weekly rise, reaching the highest level since the week ended October 2009.

Lower mortgage rates reduce monthly payments for those who are refinancing, putting more cash into their hands to funnel into the economy. However, many have found themselves restricted due to tight lending standards or unemployment and others cannot refinance because they are underwater, meaning they owe more on their mortgage than their home is worth.

Ellen Bitton, president and CEO of Park Avenue Mortgage Group in New York, said low rates have been a boon for business.

Telephones are ringing off the hook for refinancing.

The expiration of the home buyer tax credits have reduced the pace of purchases, particularly at the lower to middle end of the markets, she said.

The government's recently expired home buyer tax credits likely pulled some sales into April that would otherwise have occurred in May or later. Buyers seeking to take advantage of the tax credits had to sign purchase contracts by April 30 and have until June 30 to close on the sales.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 3.3 percent, its third straight weekly drop, reaching the lowest since April 1997.

A further decline in the coming weeks would point to potentially bigger effects on home sales and construction.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.80 percent, down 0.03 percentage point from the previous week, reaching the lowest level since the week ended November 27, 2009.

Interest rates were nearly at their year-ago level of 4.81 percent. An all-time low of 4.61 percent was set in the week ended March 27, 2009. The survey has been conducted weekly since 1990.

The MBA said fixed 15-year mortgage rates averaged 4.25 percent, up from 4.19 percent the previous week. Rates on one-year adjustable-rate mortgage, or ARMs, increased to 6.83 percent from 6.81 percent.

Mortgage