Pay debt or invest?

QWhat should I spend some extra monthly money on — paying down my mortgage faster, or investing it in a stock market index fund? — T.M., Norwich, Connecticut A Paying off your mortgage early is often worthwhile, especially if you’re nearing retirement, as few people want to be on the hook for mortgage payments in retirement. But whether it’s smart to prioritize paying off your mortgage depends on some factors, such as interest rates.

If your mortgage interest rate is 5 percent, then any extra principal you pay off will save you 5 percent in interest payments — which is like earning a 5 percent return. If you hope to earn the stock market’s longterm average annual return of roughly 10 percent, then that’s clearly more compelling than the 5 percent return.

Remember, though, that the 5 percent is much more of a sure thing than the 10 percent. This decision is easier when mortgage interest rates are high.

Q

When a mutual fund holds dividend-paying stocks, where do those dividends go? — D.D., Columbus, Mississippi A The dividends paid belong to the shareholders, not the fund company. Typically, when you first invest some money in a fund, you’ll be asked to specify whether you want to receive the dividends as cash payments or have them reinvested in additional shares of the fund.

After a fund receives dividends and before it distributes them to shareholders, the dividends’ value is added to the fund’s net asset value (NAV). Later, the NAV is reduced to reflect the departure of accumulated dividends. So don’t be alarmed if you see a fund suddenly drop in value one day — it might simply mean that a dividend distribution was made.