NEW YORK -- U.S. mortgage applications rose for the first time in three weeks as interest rates fell sharply and demand surged for home purchase and refinance loans, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Aug. 3 increased 8.1 percent to 656.5, its highest level since early June.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 1.2 percent to 626.0.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.41 percent, down 0.09 percentage point from the previous week. Interest rates were below year-ago levels at 6.45 percent.

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of U.S. home sales, rose 7.4 percent to 447.4. The index was also above its year-earlier level of 388.9.

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The group's seasonally adjusted index of refinancing applications soared 9.1 percent to 1,881.1. The index was also above its year-earlier level of 1,518.1.

The refinance share of applications increased to 39.9 percent from 39.4 percent the previous week.

Fixed 15-year mortgage rates averaged 6.16 percent, down from 6.20 percent.

Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.69 percent from 5.73 percent.

The ARM share of activity increased to 22.5 percent, up from 22.3 percent the previous week.

U.S. housing industry indexes, in general, tend to be volatile, but recent data suggest a glimmer of hope may be on the horizon for the hard-hit sector.

The National Association of Realtors last week said pending sales of previously owned U.S. homes rose at their fastest pace in more than three years in June.

The MBA's survey covers about 50 percent of all U.S. retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.

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