Hot Water Heater Buyer’s Guide

By Michael Thomas

Hot Water Heater Buyer’s Guide

A new water heater can save you thousands of dollars

Hot water heaters use a lot of energy. In fact, they are the second biggest users of energy in your home (behind your space heating and cooling system). 

The average American family spends $600 per year and emits about a ton of CO2 pollution to heat up water that for the most part they won’t use. That’s because conventional electric water heaters and tankless water heaters aren’t very energy efficient.

But fortunately there are ways to reduce that cost dramatically. 

In fact, the average homeowner can save $300 per year by switching to a heat pump water heater. And those savings add up. Over 15 years (the typical lifespan of a water heater) the average homeowner can save $4,500. And while that’s not as much as you can save switching to a heat pump (for heating and cooling your home) it is more than you can save switching to LED lights.

But choosing a water heater is no easy task. Online information is often inaccurate and confusing. 

That’s why we created this guide.

In this guide we’ll go over everything you need to know in order to pick the best water heater for your home and take advantage of those savings opportunities. We’ve also written comprehensive guides and reviews for each type of water heater:

But if you don’t know anything about water heaters we’d recommend starting with the guide. You can think of it as your hot water heater 101 article.

How to find a water heater that works in your home

Depending on where you live you may or may not be limited by what type of hot water heaters you can buy. The two most frequent constraints are:

  1. The amount of space you have to house the hot water heater — If you live in a small home you may be unable to fit a large water heater tank in your home meaning a tankless option will be better.
  2. The type of fuel you have in your home — If you live in a home without a gas line then you won’t be able to buy a natural gas hot water heater meaning an electric option will be better.

There are other edge cases, but these are by far the two most common constraints to consider.

As a general rule of thumb, heat pump water heaters are the best option unless you don’t have the space for a tank. In that case tankless water heaters are best. We reviewed both the best heat pump (aka hybrid) water heater and the best tankless water heater.

The upfront cost of a water heater

The next thing to consider is how much your hot water heater will cost upfront. This can be broken down into two different categories:

  1. The unit cost — This is the cost of the actual hot water heater itself
  2. The installation cost — This is how much you’ll pay in labor and parts to a plumber to install your hot water heater

Costs will vary depending on what type of hot water heater you choose to go with, but here are some general rules of thumb that can be helpful in thinking of the value (i.e. cost vs. what you get) for your hot water heater:

  • Type of water heater — By far the biggest influence on the price is the type of water heater you choose to buy. In terms of upfront cost, tankless water heaters are the cheapest followed by storage tanks. Hybrid water heaters and solar water heaters are more expensive upfront, but save money in the long run.
  • Energy efficiency — In the hot water heater market, efficiency is everything. Generally the biggest factor in the cost of a system is going to be how much it costs to operate each year. The less it costs to operate every year (i.e. the more efficient a hot water heater), the more the unit will cost.
  • Size and heating capacity — The next biggest factor is the size of the water tank (measured in gallons) or if you’re evaluating tankless water heaters the capacity of the unit (usually measured in gallons per minute). The bigger the tank or greater the heating capacity the more you’ll pay.
  • Warranty and expected lifetime — The next factor that influences price is how long the product will last. The longer the warranty or expected lifetime of the unit, the more you’ll pay. In our electric water heater reviews we wrote a bit about the various options you have when choosing a warranty.

The annual cost of a water heater

In addition to the upfront cost, you’ll want to consider how much it will cost to operate your hot water heater over time. There are generally two factors that influence the operating cost:

  1. The cost of energy — Energy prices vary widely depending on where you live. That’s why the best water heater for someone in Hawaii won’t be the best one for someone living in Maine. Before you make your decision, check your utility bill to see how much electricity or gas costs where you live.
  2. Energy efficiency — The next variable to consider is the energy efficiency, also called the “energy factor” or “coefficient of performance” of a hot water heater.

If you want to understand the exact equation to determine a water heater’s energy factor, this is a good guide by the Department of Energy. But if math and acronyms like BTUs scare you, don’t worry. Every hot water heater sold must include an estimate of how much it costs to operate each year. This information is usually listed on the label in yellow like the image below.

But keep in mind that these estimates are based on the average cost of energy in the United States (roughly $.12 kWh).

If you live somewhere that energy costs more than the average it will be more. If you live somewhere that energy costs less than the average it will be less.

Below is a map of electricity prices by state in America. If your state is dark purple you should expect to pay more than what is listed on the Energy Star label. If it is yellow, you should expect to pay less.

Water heater sizing guide

The next thing you’ll want to consider is how much hot water you’ll need. There are two factors that influence that: 

  1. How many people live in your home — More people in the house means more hot showers, dishes to wash, and laundry loads.
  2. The maximum hot water you’ll use at one time — You’ll want to consider how many hot showers you’ll need at once or in a row and how often appliances like dishwashers and laundry machines run at the same time as the shower.

If you are buying a storage or heat pump (also called a hybrid hot water heater) the size will be in gallons. Whereas if you are buying a tankless hot water heater the size and capacity will be measured in gallons per minute (GPM).

The carbon footprint of your hot water heater

Residential energy usage is one of the biggest causes of global warming. And hot water heaters are the second most energy intensive appliance in your home, consuming roughly 20% of your home’s energy. That’s why it’s important to consider the hot water heater with the lowest carbon footprint. 

And whether you think climate change is a hoax (we certainly hope this isn’t true) or whether you’re an avid environmentalist, many cities and states already regulate hot water heaters due to their energy usage. In fact, cities across the country are banning natural gas hot water heaters in new homes.

Below is a chart that shows the annual emissions based on different types of hot water heaters. As you can see storage tanks are the worst for the environment, followed by electric resistance. The numbers in parentheses represent the energy factor (i.e. the energy efficiency of the unit). So as energy efficiency rises, emissions fall. 

The most environmentally-friendly hot water heater is a solar hot water heater followed by a heat pump water heater

How to find water heater rebates and incentives 

Due to the high energy usage of hot water heaters, there are many incentives and rebates to encourage consumers to buy the most efficient models. There are five different possible incentives you can receive: 

  • Federal government tax credits — You can receive $300 in tax credits if you buy a heat pump water heater. See more here.
  • State government incentives — You may also be eligible for a rebate or tax credit from your state government. You can search for incentives in your state by going to this website.
  • City government incentives — Many cities also offer rebates and tax credits for energy efficient hot water heaters. This website (linked above) will also show you city incentives.
  • Utility incentives and rebates — Even your utility (or coop) may offer rebates and tax credits for a new hot water heater. To find out whether they do, search Google for your utility and the keyword “hot water heater rebate.”
  • Manufacturer rebates — And lastly, hot water heater manufacturers also offer rebates to incentivize you to buy their products.

Depending on where you live this could result in $300-1,000 in savings. That’s a lot of money considering that the average hot water heater is about $1,500 to install. 

But keep in mind, you’ll get the best incentives if you opt for the most energy efficient model. Many of the government and utility rebates require that you buy a model with a minimum energy factor of 2.

How to finance your water heater

The last thing to consider when buying a hot water heater is the financing options available. Of course, this part is optional. But there is one type of financing that all homeowners should at least research before making a decision. And that’s on-bill financing. 

The way on-bill financing works is pretty simple. You tell your utility you want to buy a new (and more energy efficient) hot water heater and they give you the money to pay for it. Then they increase your utility bill to make their money back. 

The difference between traditional loans is that it comes with little to no interest. If your hot water heater goes out, this is a good way to get some financial help to make the fix. But even if your hot water heater still works you may be able to save money each month by replacing your unit. 

Assuming the energy efficiency upgrade is cheaper than the monthly payments, it’s essentially a free way to finance home improvements and cut your emissions dramatically.

Read our other energy efficiency guides for more savings tips

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