A heat pump is a versatile, all-in-one heating and cooling system that is installed outside your home. It works by transferring thermal energy between spaces to either heat or cool your living area. In heating mode, the heat pump extracts heat from the outside air and moves it indoors. In cooling mode, it removes heat from the indoor air and releases it outside. Heat pumps are generally more environmentally friendly than traditional HVAC systems that rely on fossil fuels.