U.S. mortgage applications rose for a third straight week as homeowners with adjustable loans took advantage of falling interest rates, data from the industry's main trade group showed on Wednesday.

The Mortgage Bankers Association in a statement said its seasonally adjusted index of mortgage application activity for the week ended August 18 edged higher by 0.1 percent to 561.5 from the previous week's 561.2.

Borrowing costs on 30-year fixed-rate mortgages last week tumbled to an average 6.38 percent from 6.54 percent in the previous week. The rate compares with the four-year high of 6.86 percent, touched in mid-June, the MBA said.

The MBA's index of refinancing activity climbed 1.3 percent to 1,608.5, its highest level since March 31. Refinancings accounted for 40.6 percent of all activity in the week, up from 39.6 percent in the prior period.

The seasonally adjusted purchase mortgage index declined 1 percent to 382.2 from 385.9, suggesting housing demand continued to soften.

ADJUSTABLE LOAN RESET LOOMS

Homeowners boosted the use of adjustable-rate loans in 2003 and 2004 as lower short-term borrowing rates offset the risk that their interest rates would rise later on.

About 30 percent of all mortgages created over the past three years are ARMs, many of which carried fixed-interest rates for three years and are scheduled to reset in by 2007.

Economists' estimates for the dollar value of ARMs that will reset in 2007 top $1 trillion.

Homeowners who are refinancing are increasingly using fixed-rate loans, according to the MBA data. The share of loans that carried adjustable rates in the week declined to 26.4 percent, the lowest since February 2004, it said.

Mortgage U.S.