Is it time to say ‘tanks for the memories' to your water heater?

The promise of a continuous supply of hot water has some homeowners considering a switch to a tankless water heater. Ads for the compact units say they can provide enough hot water for a teenager to take a shower while the dishwasher is running and perhaps the washing machine too.

The attraction of tankless water heaters is that they heat on demand rather than continuously heating and storing water like a conventional water heating system. The heaters use high-powered burners to quickly heat water as it runs through a heat exchanger. We've seen in our tests that they're at least 20 percent more energy efficient than a gas-powered storage-tank heater but there are other costs to consider.

The tankless heaters we tested cost between $800 to $1,150, roughly double the expense of most storage-tank heaters. You might also have to upgrade electrical outlets, water and gas lines and steel ventilation pipes, which could boost installation costs to near $1,200. Tax credits may offset some of the cost. A tankless water heater might make sense if:

• You're a light or infrequent hot-water user. Our online calculator can help you match a tankless unit's output—measured in gallons-per-minute (GPM)—to your family's water use.
• You have warm groundwater, which means it'll take less energy to heat water to the temperature you desire. Have a professional calculate your home's average groundwater temperature when recommending a GPM rating.
• You don't have hard water, which can clog up the unit and add to maintenance costs.
• You live in an area warm enough to allow mounting the unit in a garage or on an exterior wall, which will cut the cost of exhaust venting.

Tankless heaters aren't the only alternative to conventional water heaters. Our tests of hybrid heat pump and solar water heaters were promising, although the solar models had a long payback time. The hybrids, however, saved enough energy to offset the $2,000 cost in years rather than decades.  For more information, read our water heater buying guide.

—Reporting by Gian Trotta

—Aaron Bailey