An index of American mortgage applications rose last week by the most in two months as a drop in borrowing costs boosted home purchases and refinancing, a private group’s survey found.

The 7.9% rise to 709.9 in the Mortgage Bankers Association’s gauge of loan demand was the biggest since an 11.9% surge in mid-August. The purchase index rose 5.8% to 461.4, while the measure of applications to refinance existing mortgages increased 10.6% to 2155.2.

The average rate on a 30-year fixed mortgage fell to 5.64% last week, which is the lowest in three weeks and compares with a record-low 4.99% reached last year. Low borrowing costs may help fuel home sales in coming months, bolstering the economy as builders meet demand, economists said.

“With mortgage rates below 6%, builders’ backlogs near record-high levels, and the prospect of imminent rebuilding activity in the Southeast, housing demand is likely to remain robust,” said chief economist at RBS Greenwich Capital Management, Stephen Stanley.

Mortgage rates are tied to the yields on long-term securities such as 10-year Treasury notes. The yield on the 4 1/4% note due August 2014 fell last week as traders speculated that high oil prices will curb economic growth, leading the Federal Reserve to slow the pace of interest rate increases.

At the current mortgage rate, the borrowing cost for each $100,000 of a loan is $576.60 a month, down from $579.77 at the prior week’s average rate of 5.69%. When mortgage rates were a record low 4.99% in June 2003, the monthly borrowing cost for each $100,000 was $536.21.

The average rate on a 15-year fixed mortgage fell to 5.03% last week from 5.06%. The rate for a one-year adjustable rate mortgage fell to 3.81% from 3.87%.

The housing market has been “steady and solid,” said the chief executive officer of New Jersey-based homebuilder Hovnanian Enterprises Inc., Ara Hovnanian, in an interview yesterday. While the average home price will keep rising, “we think it’s likely that it’s not going to accelerate and appreciate quite at the pace it’s been over the last few years,” he said.

The National Association of Home Builders said October 18 that its index of optimism among American homebuilders climbed to the highest in a year during October. The trade group’s gauge of market expectations for the next six months rose to the highest since 1999. Builders will probably start work on 1.94 million new homes this year, a 26-year high, according to a forecast by the National Association of Realtors.

Housing is an issue in this year’s presidential campaign, with President Bush saying his policies have contributed to record home ownership levels. Democratic challenger John Kerry said Mr. Bush hasn’t done enough to ensure that housing is available and affordable.

The Mortgage Bankers Association said applications to refinance made up 45.6% of the total bids last week, up from 44.5% the week before. The share of adjustable rate mortgages of all applications fell to 34.8% from 34.9%.

“Mortgage rate have been consistently lower than people expected at the beginning of the year,” said the president of Americana Mortgage Group Inc., Bob Moulton, in an interview. “We are anticipating rates going up sooner or later, but right now the low rates are fueling the housing market, which is helping fuel the economy” through refinancing.

Federal Reserve Chairman Alan Greenspan told the American Community Bankers in Washington yesterday that “debt-service ratios at least for a while should rise only modestly” even with rising interest rates, because “most consumer and mortgage loans have fixed rates.”

Record consumer debt won’t become “destabilizing” to the American economy so long as there isn’t a “significant fall” in home prices or household incomes, an unlikely prospect, Mr. Greenspan said.