Selecting a water heater can be one of the most important decisions you make concerning your home's overall energy consumption. Your climate and heating habits make the largest difference in determining whether a direct or indirect hot water system will be more suitable.
Direct heaters use a tankless unit that is attached to your boiler or furnace. When needed, water flows through a coil in the furnace and is heated on its way to the opened faucet. Direct hot water systems do not constantly keep a tank of water hot.
Indirect systems use a storage tank, but unlike a traditional heater, they get their heat from your furnace. Because they have a tank, the furnace will not have to turn on and off as frequently to keep up with your home's hot water demands.
The indirect system is more efficient in most climates. However, some heat is necessarily lost while water is held in the indirect system's tank. In especially cold climates where a furnace is forced to run frequently, a direct heater can save energy and money.