The correct answer is A. In a fully amortizing mortgage, each scheduled debt-service payment generally includes interest plus a portion of principal. Over the loan term, the principal portions reduce the unpaid loan balance until the final scheduled payment retires the debt completely.

Early in a standard amortization schedule, a comparatively larger portion of each payment goes toward interest because interest is calculated against a larger outstanding principal balance. As principal is progressively repaid, the interest component decreases and the principal component increases.

This differs from an interest-only loan, where scheduled payments may not reduce principal during the interest-only period, and from a balloon mortgage, where regular payments do not fully amortize the balance and a substantial final amount remains due.

Taxes and insurance may also be collected as part of a borrower ' s overall monthly payment through an escrow or impound arrangement, but those amounts are not themselves principal and interest on the debt.

Study Guide Reference: Financing — Mortgage Amortization, Principal and Interest.