U.S. mortgage applications jumped last week to their highest since late May as interest rates tumbled below 5 percent, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week to September 18 increased 12.8 percent to 668.5, the highest since the week ended May 22.

While consumers clamored for home refinancing loans, their appetite was also robust for applications to buy a home, a tentative early indicator of sales. The overall trend bodes well for the hard-hit U.S. housing market, which has been showing signs of stabilization.

Eric Belsky, executive director at Harvard University's Joint Center for Housing Studies, said several months of improvement in new and existing home sales is a positive sign.

Low interest rates on mortgages are important to the fledgling housing recovery, he said, and this has made a significant impact on the affordability front.

While an uptick may bring buyers anxious that rates will keep rising into the market temporarily, a material increase in rates could threaten the rebound, he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.97 percent, down 0.11 percentage point from the prior week and the first time since the week to May 22 the rate on this most widely used home loan was below 5 percent.

However, the rate remained above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. Nevertheless, interest rates were well below year-ago levels of 6.08 percent.

The U.S. government has embarked on an aggressive plan to bring mortgage rates down to levels that would spur demand and help the battered housing market to begin to recover.

The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The Fed expects to have bought all the Treasuries by end-October while purchases of agency MBS and agency debt are due to be completed by year-end.

On Wednesday the Fed's policy-making Federal Open Market Committee will make a statement after a two-day meeting. Any changes, such as plans to end programs early or not use the full amounts budgeted, could make interest rates on mortgages rise, which would be negative for the housing market.

Low mortgage rates, high affordability and an $8,000 tax credit for first-time home buyers -- part of the government's stimulus bill -- have helped stabilize the market.

But with the tax credit set to end November 30 and distressed properties making up a high proportion of sales, the flurry of activity masks uncertainty about the long-term outlook.

While it is by no means a slam-dunk, it does feel increasingly likely that the tax credit will be extended beyond the end of November or revived some time next year, said Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania.

The MBA's seasonally adjusted purchase index rose 5.6 percent to 288.3, driven by applications for government-insured loans. The government purchase index was at the highest level ever recorded in the survey and the share of purchase applications that were government-insured was 45.7 percent, the highest share since November 1990, the MBA said.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.3 percent.

The MBA's seasonally adjusted index of refinancing applications increased 17.4 percent to 2,881.5, its highest since the week ended May 29.

The refinance share of applications increased to 63.8 percent from 61.0 percent the previous week, but remained significantly lower than the peak of 85.3 percent in the week to January 9. The adjustable-rate mortgage share of activity increased to 6.7 percent, up from 6.0 percent the prior week.

The National Association of Realtors on Thursday releases August data on U.S. existing home sales and on Friday the Commerce Department releases August data on new home sales.

(Editing by James Dalgleish)

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