A tankless water heaters uses 30 to 50 percent less energy than units with tanks, saving a typical family about $100 or more per year, depending on water usage. Tankless units (also called “on demand” units) heat water only when you turn on the faucet. They usually operate on natural gas or propane. The main advantage is that they eliminate the extra cost of keeping 40 to 50 gallons of water hot in a storage tank, so you waste less energy. They also offer a continuous supply of hot water, which is ideal for filling a big hot tub or a whirlpool. They're more compact than a standard water heater and mount on a wall.
The primary disadvantage is the upfront cost. The smaller units that you often see won't produce enough hot water to serve most households. They'll only serve one faucet at a time—a problem if you want to shower while the dishwasher is running. Larger units that can handle the demand of a whole family, but are expensive.
But because tankless units have high-powered burners, they also have special venting requirements (a dedicated, sealed vent system, which requires professional installation). Natural gas burners often need a larger diameter gas pipe, which adds to the initial installation cost.
The bottom line: When you're pricing a unit, be sure to get an estimate or firm bid on installation costs. This is not a do-it yourself project unless you have pro-level skills. You can find tankless water heaters at many home centers and plumbing specialty stores.