U.S. mortgage applications bounced from three-month lows last week as potential buyers locked in lower borrowing costs before the federal tax credit expires, the Mortgage Bankers Association said on Wednesday.

Thirty-year mortgage rates dropped to hover around 5 percent, falling about 1/4 percentage point in just two weeks, stoking home loan demand after applications slid for two straight weeks.

Purchase applications continued to increase coming out of the Easter holiday, as we approach the end of the homebuyer tax credit, and are up modestly over last month, said Michael Fratantoni, MBA's vice president of research and economics.

Demand for loans to buy a home increased 10.1 percent, offsetting the 10.5 percent drop the prior week, to send the industry group's total applications index up 13.6 percent on a seasonally adjusted basis.

Refinancing picked up by 15.8 percent to represent 60 percent of all applications last week.

Falling Treasury yields, used as a peg for mortgage rates, helped reduce the average 30-year loan rate by 0.13 percentage point to 5.04 percent.

The rate was up to 5.31 percent two weeks earlier, the highest since August 2009, and remains above the record low of 4.61 percent set in March of last year.

Harsh winter weather sapped housing demand in the first months of the year. The initial wave of the homebuyer tax credit, extended and broadened late last year, is seen having robbed some of this year's demand.

But some signs have emerged that buyers are surfacing to lock in the credit while they can. If they qualify for the incentives of up to $8,000, they need to have home contracts signed by the end of April and close loans by June 30.

Permits to build houses, for example, in April shot up to the highest level since October 2008.

At best, though, housing is widely seen hovering around current weak levels at least through the year. The market still needs to work through a record stockpile of foreclosed properties, which RealtyTrac forecasts could drag into 2013.

Jack Pritchard, Charlotte, North Carolina-based co-founder of Refinance.com, sees rising mortgage rates later this year and the expiration of the tax credits cutting into home sales and refinancing.

The spring housing season, even with the tax credit, would be considered stable -- but stable at the bottom, he said.

You've got a consumer trying to time the ultimate bottom in real estate prices and you still have extremely tight credit standards for consumers to qualify, Pritchard added.

Mortgage