Plunging mortgage rates sent mortgage applications skyrocketing last week, the Mortgage Bankers Association reports in its weekly survey released Wednesday.

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Mortgage application volume reflecting demand for home purchases and refinances soared 49.1 percent in the week ending Jan. 9, compared to the previous week, the MBA reports.

Most of that jump was attributed to a 66 percent seasonally adjusted increase in applications to refinance. Refinance applications are now at the highest level since July 2013.

Applications for home purchases, viewed as a gauge of future homebuying activity, rose to a seasonally adjusted 24 percent from the previous week. Applications for home purchases are now 2 percent higher than they were a year ago. The MBA said a new 3 percent down payment option for qualified buyers at Fannie Mae contributed to the gain.

"Purchase application volume was at its highest level since September 2013 … and notably increased across most loan size categories, particularly for the conforming, middle of the market loan segments that had been weak for much of the past year," says Michael Fratantoni, the MBA’s chief economist.

The 30-year fixed-rate mortgage dropped to a 3.89 percent average last week, its lowest level since May 2013.

"In addition to the drop in rates, and news of improvement in the job market, there was additional positive news for prospective home buyers with evidence that credit availability has increased somewhat, and with the FHA's announcement of a decrease in their mortgage insurance premiums," Fratantoni says.

Source: CNBC