Mortgage applications in America increased last week by the most in more than two months as a drop in borrowing costs spurred home purchases and refinancing, a private report showed yesterday.

The Mortgage Bankers Association’s index rose 6.8% to 771.6 in the week ended September 2 from 722.5 in the prior week. The rise was the biggest since the week ended July 1. The average 30-year mortgage rate fell to 5.64%, the fourth straight decline and the lowest in two months, from 5.73%.

An improving job market and interest rates that have held below 6% since March are helping support housing demand, a mainstay of the economy, economists said.

“The momentum in the economy and job market, combined with mortgage rates that remain near generational lows, continues to provide a solid backdrop for housing,” the chief economist at Action Economics, Mike Englund, said before the report.

The index of purchase applications increased 6.1% to 499.1 from 470.6. The mortgage bankers group’s gauge of applications to refinance existing mortgages rose 7.7% to 2357.1 last week from 2187.8.

American employers added 169,000 workers in August, and the unemployment rate fell to 4.9%, the lowest in four years, the Labor Department in Washington said last week. The economy added 44,000 more jobs in June and July combined than the government estimated last month.

Thirty-year fixed mortgage rates remain within a percentage point of the four-decade low 4.99% recorded in June of 2003.

Low borrowing costs and hiring have helped give homebuyers the wherewithal to afford homes that have risen in price, while cash from refinancing has boosted consumer spending through the expansion.

Home prices surged 13.4% in the second quarter from a year earlier, the largest gain in 26 years, according to a September 1 report from the Washington-based Office of Federal Housing Enterprise Oversight.

Horsham, Penn.-based Toll Brothers, the largest American builder of luxury homes, said August 25 that profit more than doubled in the three months ended July 31 as sales surged to a record.

The jump in prices has raised concern among some economists that demand may slow in coming months, removing a source of cash for consumers.

“Prices in some regional markets have become dangerously frothy,” a senior economist at Lehman Brothers, Joseph Abate, said.

Still, the prospect of slower economic growth following Hurricane Katrina may keep a lid on interest rates and support sales, economists, including David Seiders of the National Association of Home Builders in Washington, said.

Home sales this year will probably reach a fifth-straight record, according to the National Association of Realtors.

The Mortgage Bankers Association survey covers about half of all American retail residential mortgage originations and has been compiled every week since 1990.