This young lady is clearly happy with her point-of-use tankless water heater.

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Should you go tankless?

Tankless water heaters are catching on in the United States as an alternative to storage tank models. Instead of constantly heating water in a stored tank, tankless units only heat water as you need it. Turning on your hot water triggers an electric or gas-powered heat exchanger that quickly heats the water to your preset temperature. There are point-of-use models that only operate one or two fixtures, or whole-house units that take care of all your water heating needs. Point-of-use models are small and can be mounted under a cabinet or in a closet. Whole-house units are also wall mounted, saving valuable floor space. To get more detail about how they operate and how to size them to fit your needs, read How Tankless Water Heaters Work.

There are many benefits to going with a tankless heater. Most units come with a federal tax rebate of $300 and are more efficient than storage tank models -- you can shave as much as 20 percent from your water heating bill [source: Energy Star]. Since tankless heaters heat water as it flows, you'll never run out of hot water. Tankless heaters also last five to ten years longer than a storage tank model. Electric models don't produce greenhouse gases, and there's no possibility of flooding due to a ruptured tank.

There are also drawbacks to tankless heaters. Natural gas whole-house units can cost up to three times as much as conventional heaters. Although you'll have an unlimited supply of hot water, there are limits on volume because the output is split between all of your fixtures. Some houses require a larger natural gas line to supply the unit with enough fuel, adding to the price. Further expense comes from venting the gas or propane with pricey stainless steel tubing. If you go with an electric unit, it may require an additional power circuit. Gas powered models produce greenhouse gases and require annual servicing. The time that it takes to get the hot water from the heater to your faucet can increase water waste.

A large whole house electric model costs $500 to $700, about the same as a similar storage tank unit. Gas models have a much larger price difference. A whole house gas tankless heater can cost as much as $2,000. The storage tank counterpart runs about $450. Installation of tankless heaters is almost always more expensive as well.

To decide which type of heater to go with, add up the total price of purchase and installation for the heaters that fit your needs. Then compare that to the efficiency rating you'll find on the yellow Energy Star sticker on the heater. The amount of time it takes to recoup the additional expense of a tankless heater is called the payback period. You should also consider that a storage tank heater will need to be replaced again in about 10 years -- you'll get roughly 15-20 years of use from your tankless model.

In the next section, we'll break down how to size your water heater.