How does a tankless water heater work?

A tankless water heater, also called “On-Demand Water Heater”, will only heat the water when there is demand, or flow, through the unit.  Inside the unit is a heat exchanger with small passageways, a burner, and some type of flow detection switch.  When flow starts, the unit will activate the burner and with the smaller water waterways the water is quickly heated to the desired temperature before leaving the unit.  They are called tankless, since there is no large tank of water that is continuously heated 24/7 when there may be no demand.