U.S. mortgage rates dropped below 5 percent in the latest week, the lowest level in 5 months, boding well for the hard-hit housing market as it copes with the absence of government support, a closely watched survey showed on Thursday.

Lower interest rates on mortgages should buoy refinancing, putting more cash into consumers' hands to funnel into the economy. They also make homes more affordable during the spring selling season, the industry's most important period.

Interest rates on 30-year fixed-rate mortgages, the most widely used loan, averaged 4.93 percent for the week ended May 13, down from the previous week's 5.00 percent. It was the lowest level since the week ended December 10, according to a survey released by Freddie Mac, the second-largest U.S. mortgage finance company.

That is above the year-ago level of 4.86 percent, as well as the record low of 4.71 percent in early December. Freddie Mac started the survey in 1971.

The National Association of Realtors reported that median house prices are recovering in more local areas in the latest quarter, Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

Mortgage rates are linked to yields on Treasuries and yields on mortgage-backed securities.

Rates are seen rising this year as the economy improves and after the Federal Reserve ended its purchases of mortgage-related securities at the end of March.

Recent robust data on pending, new and existing home sales show the sector has benefited smartly from recently expired home buyer tax credits. Those seeking to take advantage of the $8,000 first-time home buyer tax credit or a $6,500 credit for home owners buying a new residence had to sign contracts by April 30 and have until June 30 to close the sales.

Upcoming data will provide insight into how housing is faring without these popular incentives.

Steve Alessandrini, vice president of corporate communications for Weichert Realtors, in Morris Plains, New Jersey, said the tax credits helped stabilize the housing market.

We expected to see a drop in buyer activity once the tax credit expired and initial reports indicate that is in fact the case, he said. However the market is still well ahead of where it was a year ago.

LOW RATES, MIXED DEMAND

The Mortgage Bankers Association said on Wednesday applications for home purchase loans dropped in the first week after the expiration of the home buyer tax credits.

Freddie Mac said the 15-year fixed-rate mortgage averaged 4.30 percent in the latest week, down from 4.36 percent the prior week, the lowest level since the week ended December 3.

Interest rates on other types of loans also hit lows.

One-year adjustable-rate mortgages were at 4.02 percent in the latest week, down from 4.07 percent the prior week and the lowest since the week ended November 4, 2004. The rate on the 5/1 ARM, set at a fixed rate for five years and adjustable each following year, was 3.95 percent, compared with 3.97 percent a week earlier. It was the lowest since Freddie Mac started tracking the 5/1 ARM in January of 2005.

A year ago, 15-year mortgages averaged 4.52 percent, the one-year ARM 4.71 percent and the 5/1 ARM 4.82 percent.

(Editing by Dan Grebler)

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