This is set 1 year after the events of silent hill 3, sometime in 2001.
Henry Townshend is living in South Ashfield, a town that's half a day's drive away from Silent Hill. He is currently happy with his daily life, living in the South Ashfield Heights apartments. However, one day he finds himself mysteriously locked in his own apartment room, Room 302. Along with experiencing strange and nightmarish dreams, he cannot escape through either the windows or his front door, which has been chained shut from the inside. No one, not even people standing directly outside the door, can hear him when he pounds on the door and cries for help. The other residents notice Henry's absence, but carry on with their everyday lives (and even with the right key, the superintendent cannot open Room 302). After five days of entrapment (Note: Henry states that he feels as if his body is frozen in time and doesn't hunger), Henry finds a hole that has opened up in his bathroom wall. Armed with only a steel pipe that broke loose when the wall opened, he proceeds to venture into the hellish madness of Walter's Otherworlds.
The hole leads Henry to a variety of strange areas, inhabited by dangerous and sometimes immortal creatures. He is able to travel between these worlds and his apartment through mysterious holes resembling the Halo of the Sun. Every time he travels back to his apartment, Henry finds himself waking up on his own bed. In these "Otherworlds", he witnesses the murders of people who are stuck in corresponding realms like him; the murders also occur in the real world. As Henry ventures further, he learns more about Walter Sullivan, a serial killer that terrorized Ashfield several years ago and left numbers carved into his victims; Walter was eventually arrested and committed suicide soon after. However, these new victims bear similar numbers carved into their bodies, matching Walter's modus operandi, and subsequent events suggest that Walter has come back as a ghost. The victims are Cynthia Velasquez, Jasper Gein, Andrew DeSalvo and Richard Braintree. Walter Sullivan was born in the same Room 302 where Henry lives now. His parents abandoned him immediately after he was born and were never seen again. The superintendent Frank Sunderland handed the newborn to the medics, and so Walter found his way to the Wish House Orphanage in the woods outside of Silent Hill, where he was taught occult rituals and teachings of the Order. Walter began to believe that Room 302 itself was his "mother". As an adult, Walter decided to "awaken" his "mother" by purifying "her" through the "21 Sacraments" ritual, which required 21 murders. Walter killed 10 people in different ways and he ended each murder by taking their hearts out. Afterwards, Walter performed the Ritual of the Holy Assumption, which allowed him to make himself the eleventh victim through suicide and still remain in his own, manifested world. The four victims that Henry encounters in his wanderings are victims 16 through 19. In Walter's Otherworlds, Henry also meets two Walters: an immortal adult and a child, an image conjured by Walter's reminiscences. An important character in the game is Eileen Galvin, Henry's next door neighbor in Room 303. For the first half of the game, the player is unable to interact with her and can only observe her through Room 302's peephole and walls. By listening to Eileen, Henry learns that Eileen is passing time in her apartment just before arriving at a friend's party. After exploring Walter's first four Otherworlds, he arrives in the fifth Otherworld: an alternate South Ashfield Heights. Henry sees Walter Sullivan knocking on Eileen's door. After finding the key that unlocks Eileen's room, Henry witnesses her bleeding to death on her living room floor, having been assaulted by Walter and named the next victim. Eileen thanks Walter's younger self for trying to protect her from his adult self and then passes out. Following Eileen's supposed death, Henry wakes up in Room 302. For the second half of the game, Henry will notice some odd things in his apartment called "hauntings"; it appears that they have been invading from the Otherworld. After exploring the first five Otherworlds, Henry wakes up and notices an ambulance on its way to St. Jerome's Hospital. A new hole leads to St. Jerome's Hospital's Otherworld, where Henry discovers Eileen, alive, in one of its rooms. Henry and Eileen decide to stay together and find a way out of Walter's world. Later, Henry takes Eileen to a hole, and he realizes that he is the only one who can use them as she is unable to see them. Eileen tells Henry about Joseph Schreiber, a journalist who disappeared six months before Henry moved into Room 302. Henry and Eileen then decide to "go down into the deepest part of him and look for the ultimate truth."
After leaving the hospital, Henry and Eileen find themselves on the top of a spiral staircase, full of strange objects such as human limbs and shadowy figures. Each Otherworld is connected by the staircase and Henry and Eileen must descend it in order to "find the ultimate truth." The Otherworlds are the same as before, except that a few paths that had been blocked before are now accessible and each victim is now a ghost that can be deadly to Henry's health.
In the first Otherworld revisited, Henry meets the victim Cynthia Velasquez, who has long, flowing black hair that covers her face. In the second Otherworld revisited, Henry meets the victim Jasper Gein, who is constantly ablaze. While exploring this world, Henry realizes that Walter Sullivan is now pursuing them. In the third Otherworld revisited, Henry meets the victim Andrew DeSalvo, who is shirtless and must be pinned down with a Sword of Obedience in order for them to continue. In the fourth Otherworld revisited, Henry meets the victim Richard Braintree, who has the ability to teleport; also in this world, Walter Sullivan kidnaps his younger, manifested self.
Henry and Eileen reach the bottom of the spiral staircase and find a dark abyss with Room 302 of the Past, a memory of Joseph Schreiber's. Henry and Eileen meet Joseph Schreiber in Room 302 of the past, who appears as a statue in the ceiling. He tells them about Walter's history and reveals that these Otherworlds are a creation of Walter's Holy Assumption ritual. Before his voice fades away, Joseph tells them that they are the last victims, Eileen, the "mother reborn" and Henry, the "receiver of wisdom". They must kill Walter in order to prevent the 21 Sacraments, or else he will kill them. In Room 302, Henry is shocked and speechless when he discovers a sealed room in his apartment that contains Walter Sullivan's corpse. After using the Keys of Liberation found in Walter's coat pocket, Henry unlocks his chained front door and is bewildered that South Ashfield Heights has also been transformed into a nightmare. Eileen then appears in the corridor and they reunite.
In the apartment Otherworld, Henry unlocks Frank Sunderland's apartment room; inside, he discovers Walter's umbilical cord that Sunderland had kept in a box for decades. Henry suddenly sees flashes of Walter's memory in his mind and falls to the floor with a massive headache; Eileen tries to comfort him, but she leaves to find Walter's child self on her own, and they separate.
Henry returns to Room 302 and discovers that Walter's corpse has disappeared. Underneath where Walter's corpse was is now a round, black abyss. Henry enters the abyss and comes across a large room with a death machine in the center with a pool of blood surrounding it. There are also eight spears and a giant monster resembling a torso (conjuror) in the room. Walter Sullivan confronts Henry and Henry realizes that Eileen is possessed and is about to walk into the large mechanism, unconsciously killing herself. The final fight of the game takes place; Henry uses Walter's umbilical cord on the monster, allowing him to spear it, and after all of the spears are used, Walter becomes mortal and Henry defeats him.