The industry Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Feb. 15 fell 22.6 percent to 822.8, the lowest level since the week ended Jan. 4.
It was the second straight week that the index fell, after having risen every week since the start of the year. The index in the prior week dropped by 2.1 percent.
The U.S. housing market is currently suffering one of the worst downturns in history. Last week's plummet in demand may indicate what is in store for the hard-hit sector this spring, which is the peak home-buying season.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09 percent, up 0.37 percentage point from the previous week, the highest since late December.
Interest rates were below year-ago levels of 6.19 percent.
Mortgage rates have been rising along with U.S. Treasury yields recently. The benchmark 10-year U.S. Treasury note yield briefly hit 3.915 percent on Tuesday, its highest since early January. Yields move inversely to price.
Overall mortgage applications last week were 35.6 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was down 3.8 percent to 1,007.0.
Fixed 15-year mortgage rates averaged 5.55 percent, up from 5.18 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) were unchanged at 5.72 percent.
Another indication that the U.S. housing market is still on the skids was last week's drop in demand for home purchase loans.
The MBA's seasonally adjusted purchase index, widely considered a timely gauge of new home sales, dropped 11.5 percent to 357.6, its lowest level since April 25, 2003.
The index came in below its year-earlier level of 381.4, a drop of 6.2 percent.
The drop in overall applications last week, however, was largely driven by decreased demand for home refinancing loans.
Consumers seeking to refinance their existing home loans tend to be highly sensitive to shifts in interest rates.