Refinancing activity reached a three-year high after shooting up 20% for the week ending Sept. 28, the Mortgage Bankers Association said Wednesday.

The trade group's refinance index grew along with the purchase index, which alone edged up 4%. Activity in both indexes created a 16.6% surge in total mortgage applications as more borrowers jumped into the market to obtain record low interest rates.

Rates continued to fall with the 30-year, fixed-rate mortgage with a conforming loan balance declining to 3.53% from 3.63% a week earlier. The average contract interest rate for the 30-year, FRM with a jumbo loan balance fell to 3.82% from 3.87%. In addition, the average 30-year backed by the FHA moved to 3.37% from 3.44%, while the 15-year, FRM fell to 2.90% from 2.98%.

"Refinance application volume jumped to the highest level in more than three years last week as each of the five mortgage rates in MBA's survey dropped to new record lows in the survey," said Mike Fratantoni, the MBA’s vice president of research and economics.

"Financial markets continue to adjust to QE3, as the ongoing presence of the Federal Reserve as a significant buyer of mortgage-backed securities applies downward pressure on rates. Although there was a slight decline in the HARP share of refinance activity, the level of HARP volume remains steady."

Paul Diggle, property economist with Capital Economics, agrees with this sentiment on quantitative easing. "Mortgage interest rates have fallen further in response to the third round of quantitative easing," Diggle said. "This translated into stronger demand for mortgages in the closing weeks of September, both from refinancers and prospective homebuyers."