Nov 8 (Reuters) - The interest rate on the most common type of U.S. residential mortgage plunged last week by the most in nearly 16 months on the back of a rally in the Treasury market that drove down the benchmark yields used to set home loan costs.

The Mortgage Bankers Association (MBA) on Wednesday said the average contract rate on a 30-year fixed-rate mortgage dropped in the week ended Nov. 3 by a quarter percentage point to 7.61%, the lowest in about a month. It was the largest weekly drop since late July 2022.

The second weekly decline further pulled home-purchasing borrowing costs down from two-decade highs near 8% reached in October when yields on the 10-year Treasury note, the benchmark for U.S. home loan rates, had been charging higher.

That months-long updraft in yields saw a sharp reversal last week after the U.S. Treasury said upcoming debt issuance would be somewhat less than previously expected and the Federal Reserve left its key overnight policy rate on hold for a second straight meeting.

"Last week's decrease in rates was driven by the U.S. Treasury's issuance update, the Fed striking a dovish tone in the November FOMC (Federal Open Market Committee) statement, and data indicating a slower job market," said Joel Kan, the MBA's vice president and deputy chief economist.

The MBA's mortgage market composite index, measuring the volume of mortgage applications for both home purchases and refinancings of existing loans, rose 2.5% from the week prior to 165.9.

Purchase applications rose 3% on the week, but they remain 20% below this time a year ago. That indicates prospective buyers are still waiting on the sidelines despite the dip in rates, said Kan. Sellers locked into lower mortgage rates continue to hold their homes, keeping a lid on inventory in the housing market.

© REUTERS