Purchase activity increased despite a small uptick in borrowing costs while refinance activity shrank to its lowest level in two months, the latest survey of mortgage applications from the Mortgage Bankers Association (MBA) shows.

Seasonally adjusted mortgage application volumes rose 0.2% for the week ending Nov. 21, falling 2% on an unadjusted basis according to the MBA’s Market Composite Index, a measure of mortgage loan application volume.

The purchase component index increased 8% from the previous week, led by increased demand for government loan products backed by the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA). The purchase index was 20% higher than one year ago on an unadjusted basis.

The rise in purchase activity came despite mortgage rates rising to their highest level since early October, noted Joel Kan, deputy chief economist of the MBA, describing the 9% monthly rise in low-downpayment government purchase applications as a symptom of broader affordability challenges.

Overall FHA share of total applications shrank to 18.8% from 19.9% the previous week, while the VA share of total applications rose to 15.4% last week from 15.2% the week prior.

“Despite slowing home-price growth and lower mortgage rates, affordability remains a challenge in many markets and government loan programs remain appealing to qualified buyers looking to purchase a home,” stated Kan.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances rose to 6.4% from 6.37%, 6.34% and 6.31% in the preceding weeks, according to MBA data.

The average interest rate for 30-year fixed-rate FHA mortgages rose slightly to 6.15% from 6.14% the previous two weeks.

Rising rates drove refinance volumes to their slowest weekly pace since early September, with the refinance component index sliding 6% from the previous week to comprise 53.4% of total application volumes, down 2% from the previous week.

Meanwhile, the adjustable-rate mortgage (ARM) share of activity increased to 7.9% of total applications after hovering around 7.5%, 7.8% and 8.7% in previous weeks. The ARM share of applications had risen to almost 11% in the middle of October as borrowers took advantage of ARM mortgage rates markedly lower than fixed-mortgage alternatives.

The average contract interest rate for 5/1 ARMs — whereby a borrower pays a fixed mortgage rate for the first five years of the loan term, after which it adjusts on an annual basis — dropped 21 basis points to 5.44% from 5.65% last week and 5.5% the week prior.