UPDATE 1-U.S. mortgage rate drop below 5 pct stirs demand

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NEW YORK, March 3 (Reuters) - U.S mortgage rates retreated below 5 percent last week, propping up demand for home loans after purchase applications sank to a nearly 13-year low in the prior week, the Mortgage Bankers Association said on Wednesday.

February’s volatile swings in housing demand came on the heels of a steep January sales slump, blamed mainly on unusually harsh winter weather.

The industry group’s market index, which measures requests for loans to buy homes and refinance, rose by a seasonally adjusted 14.6 percent in the week ended Feb. 26 to the highest level since mid-December.

Purchase applications increased 9 percent while refinancing requests jumped 17.2 percent last week, as average 30-year mortgage rates fell 0.08 percentage point to 4.95 percent.

"Mortgage applications rebounded last week, particularly refis, as rates dropped back below 5 percent," Michael Fratantoni, vice president of research and economics at MBA, said in a statement. "Purchase activity remains subdued, with application volumes remaining within the narrow range seen in the last few months." ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For related graphic, click on ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Refinancing loans represented about 69 percent of all applications last week.

The 30-year mortgage rate, which the industry group said reached a record low of 4.61 percent almost a year ago, is seen headed as high as 6 percent after the Federal Reserve ends its $1.25 trillion in mortgage bond purchases on March 31. The program is aimed at keeping rates low to revive housing and the economy.

The road to stabilization has been riddled with potholes.

In January, sales of existing homes sank by more than 7 percent to the weakest level since June, and new home sales set a record low.

Snow blasted most U.S. states, but the erratic sales pace in recent months also stems from the fits and starts of the $8,000 first-time home buyer tax credit.

The credit pulled sales forward last year, as buyers raced to beat its November expiration. The incentive was ultimately extended, and expanded with a $6,500 move-up buyer credit, spurring a second wave of demand after a brief lull.

To get these incentives qualified borrowers need to sign contracts by the end of April and close loans by the end of June. (Editing by Jeffrey Benkoe)