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Originally Posted by mrkajz44
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The idea that the bank is ripping you off is also wrong. This protects banks from people signing longer term fixed rate mortgages (5+ years) and then cancelling 2 years in because interest rates fall. The consumer is protected for rates rising by getting a fixed rate. The bank is protected for falling rates by the prepayment penalty. Both sides are just protecting their interests, which makes sense in a long term contract.
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Well, yes and no. Big banks "buy" consumer mortgages, then package and sell them to other financial institutions making money on spreads and fees.
In US - consumers get a 30-yr fixed rate mortgage on a house which can be paid out anytime without a penalty. So, pre-payment penalties are not a common necessary evil.