U.S. home mortgage applications increased last week to their highest level since late May as interest rates dropped below 5 percent according to a Mortgage Bankers Association report released Wednesday.

MBA’s seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Sept 18 was up 12.8 percent to 668.5, the highest level since the week ended May 22.

While consumers clamored for home refinancing loans, their appetite for applications to buy a home, a tentative early indicator of sales, was also up. This is an indication that the hard hit housing market has been showing signs of stabilization.

Average rates on 30-year fixed-rate mortgages were down 0.11 percent to 4.97 percent (excluding fees). It was the first time since the week ended May 22 that the rate on this home loan was below 5 percent. Still, the rate remained above the record-low of 4.61 percent set in the week ended March 27.

Nonetheless, interest rates were still below last year’s level of 6.08 percent. The survey has been conducted weekly since 1990.

Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers have helped stabilize the market.

The MBA's seasonally adjusted purchase index increased 5.6 percent to 288.3, as applications for government-insured loans boosted purchases. The share of purchase applications that were government-insured was 45.7 percent, the highest share since November 1990, the MBA said.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.3 percent.

The Mortgage Bankers seasonally adjusted index of refinancing applications increased 17.4 percent to 2,881.5, with the index at its highest since the week ended May 29.

The refinance share of applications increased to 63.8 percent from 61.0 percent the previous week, but remained well below the peak of 85.3 percent in the week to January 9. The adjustable-rate mortgage share of activity increased to 6.7 percent, up from 6.0 percent the prior week.

Average fixed 15-year mortgage rates were 4.41 percent, same as the previous week. Rates on one-year ARMs dropped to 6.52 percent from 6.61 percent.