Aug 25 (Reuters) - Mortgage applications increased last week, as purchasing applications posted their largest increase since early July while mortgage rates edged down. The Mortgage Bankers Association (MBA) said on Wednesday its average contract interest rate for traditional 30-year mortgages declined to 3.03% from 3.06% in the week ending Aug. 20. The seasonally adjusted market composite index tracking mortgage applications rose 1.6% from a week earlier, reflecting a 0.9% increase in applications to refinance existing loans. Purchase applications rose 3.0%, the MBA said. After hitting record lows late last year below 2.9%, mortgage rates climbed in the first part of this year and peaked in the spring. Rates had been drifting lower since, held down in large part by the U.S. Federal Reserve"s extraordinary stimulus measures aimed at helping the economy rebound from the coronavirus pandemic, but ticked higher last week after data showed a hiring surge last month. "The purchase index was at its highest level since early July, despite still continuing to lag 2020’s pace," said Joel Kan, MBA’s associate vice president of economic and industry forecasting. "There was also some easing in average loan sizes, which is potentially a sign that more first-time buyers looking for lower-priced homes are being helped by the recent uptick in for-sale inventory for both newly built homes and existing homes." Existing home sales climbed for the second consecutive month in July, a report from the National Association of Realtors showed Monday. read more New home sales also increased in July after three consecutive monthly declines, the Commerce Department said Tuesday. However, momentum in the housing market appears to be slowing down as housing prices have continued to surge this year amid tight supply. read more "Strong demand, still-low mortgage rates and a modest increase in the inventory of existing homes are supportive of home sales," said Nancy Vanden Houten, lead economist at Oxford Economics in New York. "However, supplies are still historically tight, and home prices at or near record levels will continue to temper the pace of home sales."