Rising mortgage rates squeeze U.S. refinancing activity

NEW YORK (Reuters) - Rising borrowing costs are dampening U.S. refinancing activity, with its weekly share of mortgage applications falling to the lowest level since August, the Mortgage Bankers Association said on Wednesday.

The Washington-based group said its index on refinancing applications fell 2.9 percent to 1,288.0 in the week ended Jan. 26 as average interest rates on 30-year mortgages rose to their highest level since March.

Home refinancing is seen a source of cash which homeowners can tap into. They can either switch into a cheaper loan which would lower their monthly payment, or borrow against the value of their homes through "cash-out" refinancing.

As mortgage rates rise, refinancing activity slows as this funding option becomes less viable for homeowners.

Average interest rates on 30-year conforming mortgages, or loans whose balances are $453,100 or less, rose to 4.41 percent, up 5 basis points from the previous week. This was highest since 4.46 percent in week of March 17.

Other 30-year mortgage rates on average were up 3 basis points on the week, while average 15-year mortgage rates climbed to 3.85 percent, the highest since April 2011.

Home loan rates have risen in step with U.S. bond yields.

Benchmark 10-year Treasury yield touched a near four-year peak of 2.746 percent on Wednesday, underpinned by bets on faster global economic growth and reduced stimulus from central banks.

The latest increase in mortgage rates also crimped application volume to buy homes.

MBA's mortgage purchase index, seen a proxy on future home sales, was down 3.4 percent to 255.5 in the Jan. 26 week. It was up about 11 percent from its year-ago levels.

It was unclear whether the decline in purchase applications is an omen for home sales in the spring, which is the annual boom season for the real estate market.

Earlier on Wednesday, the National Association of Realtors said its index on pending home sales, another future sales gauge, rose for a third straight month in December.

The drop in both refinancing and purchase requests knocked overall mortgage activity from a four-month peak set the week before.

MBA's total mortgage application index fell 2.6 percent to 413.4.

(Reporting by Richard Leong; Editing by Chizu Nomiyama and Meredith Mazzilli)