At the end of 1 year, what financial effect impacts the remaining balance of the mortgage?

The application of principal payment is the correct choice because, over a year, making regular mortgage payments typically involves both interest and principal components. When a borrower makes a payment, a portion of that payment goes toward reducing the principal balance of the loan. This reduction directly impacts the remaining balance of the mortgage by decreasing the amount owed to the lender.

Each payment made brings the borrower closer to full ownership of the property because it not only covers the interest but also chips away at the principal amount. This results in a lower balance at the end of the year compared to the beginning, which is essential for understanding how mortgages work and how they are amortized over time.

Other potential options, such as a reduction in interest rate, increasing the loan amount, or completing an initial term, do not inherently affect the remaining mortgage balance in the same direct manner as the application of principal payment does. A reduced interest rate could lead to lower future payments but does not impact the current balance unless it is applied to the next payment cycle. Increasing the loan amount would increase the balance, while completing the initial term typically signifies the end of that loan phase; it may not directly reflect the remaining balance effect during the year in question.