UPDATE 1-US mortgage refinancing demand jumps

(Adds quotes, additional data)

By Julie Haviv

NEW YORK, Jan 14 (Reuters) - U.S. mortgage applications jumped last week as record low interest rates spurred the greatest level of refinance demand in 5-1/2 years, although fewer potential buyers sought loans, data from an industry group showed on Wednesday.

The ability to refinance to lower monthly payments should provide a bit of relief to strapped consumers amid rising unemployment and a shrinking economy. However, the number of applications for buying a home remained near eight-year lows, offering little sign of a recovery from the worst housing downturn since the Great Depression.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended Jan. 9 increased 15.8 percent to 1,324.8, the highest reading since the week ended July 11, 2003, when it reached 1,358.2.

Low mortgage rates should eventually boost demand for home purchases, but other factors are keeping many buyers sidelined, said Adam York, an economic analyst at Wachovia Corp in Charlotte, North Carolina.

"The home purchase market should be much slower than the refinance market as long as unemployment is climbing, the economy is weakening and financial markets are turbulent," he said.

"People want to be more comfortable about the outlook for the housing market, their job security and income stream in order for them to start thinking about buying a home as these factors are outweighing the benefit of low mortgage rates," he said.

Thirty-year mortgage rates have dropped dramatically since the Federal Reserve unveiled a plan in late November to buy as much as $500 billion of mortgage securities backed by Fannie Mae (FNM.P) (FNM.N), Freddie Mac (FRE.P)(FRE.N) and Ginnie Mae, which has driven mortgage rates lower.

The refinance share of applications increased to 85.3 percent from 79.8 percent the previous week, the highest level since the MBA started conducting its survey in 1990.

Spencer Rascoff, chief operating officer at Zillow.com, an online real estate service company based in Seattle, said loan requests to his company are up more than 200 percent from just two months ago, with loan requests on pace to hit about 25,000 in January and loan quotes on pace to hit 200,000.

"Many experts agree that rates will stay relatively low for at least the next few months since the federal government is now committed to buying mortgage-backed securities to keep borrowing costs low," Rascoff said on Tuesday.

"But the future of rates isn't certain, so locking in these low rates now is a smart move," he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.89 percent, down 0.18 percentage point from the previous week, the lowest level recorded in the MBA's survey's history.

Interest rates were well below year-ago levels of 5.62 percent.

"Our business has definitely increased dramatically in the past few weeks with rates dropping," Melissa Cohn, chairman and chief executive CEO of Manhattan Mortgage Company in New York, said on Tuesday.