By Evan Sully

(Reuters) - U.S. applications for home mortgages decreased by the most in almost five months driven by sharp declines in refinancing activity and purchase applications.

The Mortgage Bankers Association (MBA) said on Wednesday its seasonally adjusted market index fell 6.9% in the week ending June 25 from a week earlier, the largest drop since early February. This reflected an 8.2% decrease in applications for refinancing existing loans and a 4.8% drop in applications to purchase a home.

The average contract interest rate for traditional 30-year mortgages increased to 3.20% last week from 3.18% the prior week.

"Purchase applications for conventional loans declined last week to the lowest level since last May," Mike Fratantoni, MBA’s Senior Vice President and Chief Economist, said in a statement. "The average loan size for total purchase applications increased, indicating that first-time homebuyers, who typically get smaller loans, are likely getting squeezed out of the market due to the lack of entry-level homes for sale."

Both new and existing home sales have fallen sharply this year due to a shortage of houses on the market.

(Reporting by Evan Sully; Editing by Dan Burns)