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By Richard Leong

NEW YORK, Aug 21 (Reuters) - U.S. homeowners filed the most applications to refinance their current mortgages in over three years as 30-year borrowing costs slipped to their lowest levels since late 2016, the Mortgage Bankers Association said on Wednesday.

Overall mortgage activity, however, declined because of a pullback in loan requests for home purchases, the Washington-based industry group said.

MBA's seasonally adjusted index on mortgage refinancing activity edged up 0.4% to 2,754.7 in the week ended Aug. 16, which was its highest since July 2016.

The refinancing share of total applications grew to 62.7%, the biggest since September 2016, from 61.4% a week earlier.

Interest rates on 30-year, fixed-rate mortgages averaged 3.90%, down 3 basis points from the prior week. This was the lowest reading since the week of Nov. 4, 2016.

Mortgage rates have fallen in recent weeks in step with bond yields as investors have piled into low-risk government bonds to shield their money because of fears about a recession and trade tensions between China and the United States.

Benchmark 10-year Treasury yields fell nearly 20 basis points last week, while the mortgage rates MBA tracks were mixed. This may be due to a 37% surge in refinancing applications the week before.

“The small moves in rates and refinancing are potentially signs that lenders may be approaching capacity constraints as they continue to deal with the largest wave of refinance activity in three years," Joe Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement.

As falling mortgage rates touched off a refinancing surge, they have yet to elicit a similar response among potential homebuyers.

“Lower mortgage rates have yet to lead to a notable rise in homebuyer demand," Kan said.

MBA's seasonally adjusted measure on loan activity for home purchases fell 3.5% to 243.8 last week, but it was 5% higher than a year earlier.

The group's gauge on overall mortgage activity dipped 0.9% to 614.6, retreating from a three-year peak reached the prior week.

(Reporting by Richard Leong; Eediting by Steve Orlofsky)