On-Demand Water Heaters
On-demand heaters are efficient and economical because they heat water only as it is required, rather than continually heating and storing it. It is best to leave the installation and maintenance of on-demand water heaters to professionals.

Storage Tank Water Heaters
Both gas and electric storage tank water heaters operate in similar ways: When you turn on a hot water faucet or use hot water in a dishwasher or clothes washer, water pipes draw hot water from the tank. The heated water is drawn from the top of the tank and is replaced by cold water that is carried to the bottom by a dip tube. When the thermostat signals that the water temperature has dropped, a burner in a gas heater or a heating element in an electric heater starts up to heat the water.

Be conservative when you set the temperature control; 120ºF is usually hot enough. A hotter setting wastes energy and could cause serious burns to an unwary bather. To maximize your water-heating energy, it's a good idea to insulate your water pipes if they run a long way from your heater to faucets.