The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 1.3 percent in the week ended August 30, after sliding 2.5 percent the prior week.
The rise came as 30-year mortgage rates fell to 4.73 percent versus 4.80 percent the prior week, which was its highest this year, according to MBA data.
The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.
Borrowing costs, however, have climbed by more than a percentage point since late May on the view that the Federal Reserve will soon reduce its monthly bond purchases, which have kept a ceiling on rates.
The Fed began the bond purchasing program nearly a year ago to boost a sluggish recovery in the U.S. economy.
The drop in rates likely encouraged borrowers into refinancing existing home loans. The refinance index rose 2.4 percent last week.
The refinance share of total mortgage activity rose to 61 percent from 60 percent the previous week, which was the lowest since April of 2011.
The gauge of loan requests for home purchases, a leading indicator of home sales, fared worse, dipping 0.4 percent.
Housing has been a bright spot in the U.S. recovery, with prices rising steadily since early 2012. Economists, however, expect the pace of the price gains to slow down for the remainder of this year and in 2014.
A sign that rising mortgage rates have taken some steam out of America's housing market recovery was reflected in a separate report last week that showed contracts to purchase previously owned U.S. homes fell for the second straight month in July.
Economists largely expect the Fed to announce a pull back at its policy meeting later this month, though some say the central bank will think twice about higher long-term interest rates if there is evidence that they are making a significant impact on housing.
Nevertheless, rates remain low by historical standards and most economists do not expect the higher costs to halt the recovery altogether. In fact, in the short-term, it could motivate potential buyers to act before rates rise even more.