How to Choose a New Water Heater

You should start your journey by reading How Water Heaters Work to fully understand how a storage tank heater operates. We'll get into tankless models in the next section, but for now let's look at the fuel options you can use for a storage tank water heater.

Electric - uses large coils that hang down into the tank to heat the water. The coils are similar to the ones in an electric oven. Generally, electric water heaters aren't as efficient as those powered by other fuel sources, and electricity is more expensive than natural gas or propane. However, they're less expensive up front and don't require venting. If your water demand is small, then it may be a good way to go.

Natural Gas - uses a gas burner at the bottom of the tank, with a venting chimney that runs through the center and out the top. The carbon dioxide and water vapor byproducts are vented through the chimney and then run outdoors through your house chimney or side wall vent. A gas pilot light or electric spark produces the flame. Natural gas models cost more than electric heaters but are more efficient to operate.

Propane - works in the same way as a natural gas, but uses propane as the fuel source. Propane is generally used as a fuel source when a home doesn't have access to natural gas. The propane is supplied from a large tank on the property.

Oil - similar to gas and propane models, but mixes the oil with air using a power burner to create a vapor mist, which is then ignited by an electric spark. Like propane, oil heat is typically used when natural gas isn't available and is also delivered to the location and stored in a large tank.

Solar - uses the heat from the sun to produce hot water. The heat is harvested by an "absorber" panel that typically sits on your rooftop. Tubes inside the panel either directly heat the water flowing through them or a transfer fluid that warms a heat exchanger. This exchanger heats your home's water in a storage tank. Solar systems can be used in conjunction with a conventional system, much like a hybrid car uses both gasoline and electricity, to cut up to 80 percent of your water heating bill.

Heat Pump - takes heat from the air and delivers it to the water via electricity. They're two to three times more efficient than electric water heaters, but consumer demand is low and there are few manufacturers. They cost more up front than conventional units and can only be used in areas where the temperature stays between 40 and 90 degrees Fahrenheit (4.4 to 32.2 degrees Celsius) year-round.

As you can see, your decision largely depends on where you live. If you have access to natural gas, it can be a very fuel efficient way to go. If you live in outlying areas where it isn't available, then your home is already set up with either oil or propane. Solar heaters are best used in areas where there's abundant sunshine, so if you live in Seattle, then it's probably not the best idea. Heat pumps can shave a great deal of money from your bill­ but are fairly uncommon, and this scares off many consumers. If you want a cost effective system that's easy to maintain and service, then a natural gas water heater is probably your best bet.

In the next section, we'll see what's going on with the tankless revolution and determine if one might be right for you.

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.

Once you've decided on your fuel type, you need to figure out what size water heater will give you enough of what you need. If you're replacing your heater, give some thought as to whether or not your previous model consistently provided enough heat. If it didn't, then you're going to want to upgrade to a larger size. Also give some consideration to whether or not your family has any potential to grow over the next decade. If you have plans to start a family or if your mother-in-law is going to be moving in with you, you'll want a larger heater as well. After you've taken all that into consideration, you can appropriately size your new heater.

For storage tank heaters, there are two important factors in sizing: the amount of water it holds and the recovery rate, which is the amount of water it can heat in one hour. The recovery rate is displayed as First Hour Rating (FHR) on the Energy Guide sticker. Generally speaking, if you live in a two-person household, you can get away with a 30 to 40 gallon heater. Three to four people require a 40 to 50 gallon tank, and if you have five or more in your house, go with a 50 to 80 gallon model. Gas heaters have a greater FHR than electric units, so they have smaller tanks with the same EF rating.

To get a more specific idea of your needs, estimate your peak hour demand and find a heater that falls within a couple of gallons of this number. Here are estimates for the number of gallons used for each household task:

[source: U.S. Department of Energy]

Multiply these numbers by the amount of times they occur in a peak hour to get your total gallons used. For instance, if you have three people in your household that all take morning showers, you'd multiply 20 gallons by three to get 60 total gallons used. If you also run the dishwasher in that same hour after your shower, add another 14 gallons to give you a grand total of 74 gallons. This is your peak hour need and what you should look for on the Energy Guide sticker. If you have limited headroom where your heater should go, look for "lowboy" models -- they're shorter and bigger around, but have the same capacity as their taller cousins.

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