Robbie plants a fanciful solution in Steve's mind when he suggests a creative method to retrieve his sister from the spirit world: "If I got killed, could I visit her and show her how to get back here? You could tie a rope around me and hold it tight. Then somebody could come and get us and we could live somewhere else." Dr. Lesh explains the reasons why ghosts or spirits of departed humans can become malevolent:

Dr. Lesh: Some people believe that when you die, your soul goes to heaven.
Robbie: When Grandpa was dying, I looked at him at the last moment. And I was watching. But I didn't see anything go up out of him.
Diane: Well, his soul is invisible Robbie. You couldn't see it.
Robbie: But how come Grandpa's there on television with Carol Anne?
Dr. Lesh: Some people believe that when people die, there's a wonderful light as bright as the sun, but it doesn't hurt to look into it. All the answers to all the questions that you ever want to know are inside that light. And when you walk to it, you become a part of it forever. And then, some people die but they don't know that they've gone.
Robbie: They think they're still alive?
Dr. Lesh: Yes. Maybe they didn't want to die. Maybe they weren't ready. Maybe they hadn't lived fully yet or they'd lived a long, long time and they still wanted more life. They resist going into that light however hard the light wants them. They just, they just hang around, watch TV, watch their friends grow up, feeling unhappy and jealous and those feelings are bad. They hurt. And then, some people just get lost on the way to the light and they need someone to guide them to it.
Robbie: Is this why some people get angry and throw things around - like in my bedroom?
Dr. Lesh: Yes. Just like in school. Like some kids are nice to you, some kids are mean.
Robbie: I got beat up once by three kids. They took my lunch money. Maybe they got hit by a truck and they're upstairs right now.

While everyone is sleeping in the downstairs living room, Marty searches in the refrigerator for something to eat. A raw piece of beef steak that he removes and sets down slowly inches its way across the kitchen counter. The chicken drumstick he has been chewing drops from his mouth to the floor - it is swarming with maggots. As he washes his mouth out in the bathroom, he has a morbid, hallucinatory experience. He watches his face deteriorate in the haunted mirror - in horror, he claws at his face and peels back the rotting flesh with his fingers, pulling off gobs of skin down to the bone [reminiscent of the Nazis' fate in Spielberg's Raiders of the Lost Ark (1981). The hands in the scene actually belonged to co-producer Spielberg]. After a sudden flash of light, his face is restored back to normal.

Sensors record vibrations and other movements. The remote video-camera directs its lens toward the upstairs room, where smoke and bright lights materialize. A spooky apparition with swirling, wispy tendrils descends the staircase, surrounded by lights and wind. The ghost whisks itself up and through the ceiling. A playback of the recording reveals numerous, blindingly-bright spirits parading down the stairway:

Robbie: Who are all those people?
Dr. Lesh: They're so alone. So alone.
Robbie: Where are they coming from?
Diane: I don't know.

Ultimately, Dr. Lesh has the first-hand evidence she sought - the jewelry and videotapes: "I'm gonna have to display these, you know." Both Freelings reject publicity from popular TV shows:

Steve: Oh please, not on 60 Minutes.
Diane: Or That's Incredible.

Dr. Lesh departs with Marty, but proposes further help. Mr. Teague (James Karen), Steve's boss, inquires about his absence during a visit in the plagued house. The piano moves, and the front-door light malfunctions - so Steve ushers him outside. The two of them take a drive to a view point above the developments, where new housing tracts are being planned:

Mr. Teague: One of your children was born in your house, huh?
Steve: Carol Anne.
Mr. Teague: I understand that she's missed a lot of school...I didn't see her.
Steve: She's around.
Mr. Teague: Listen, I wonder if you'd mind if I asked you a question? Are you thinking about leaving Cuesta Verde?...(He marks a spot on the hillside) How's that spot for a bay window, huh?
Steve: Yeah, well, it's pretty nice if you're living up here, but uh, not so great down there in the valley havin' to look at a bunch of homes cutting into the hillside.
Mr. Teague: But you don't have to live in the valley anymore.
Steve: What are you saying?
Mr. Teague: We're starting Phase Five right here where we're standing. All of this can be your master bedroom suite. That can be your view. Interested?
Steve: Oh, Mr. Teague, you know, that's a generous offer. I'm just not a developer.
Mr. Teague: You're responsible for 42 percent of sales. That's almost half of everything down there. Almost 70 million dollars worth of dwelling and properties. Now that's a whole generation of security that nobody can put a price-tag on. Now look, I know we should have made you a full partner three years ago. Well, I don't want to lose you now.

The proposed location for Steve's new home rests next to a vast cemetery: "Not much room for a pool, is there?" he surmises. Teague reassures him: "We own all the land. We've already made arrangements for relocating the cemetery." Steve is flabbergasted that a sacred graveyard would be disturbed for further development by the greedy real estate company. An explanation for Carol Anne's abduction arises - developers built their own house over a bulldozed, sacred Indian burial ground:

Steve: Oh you're kidding. Oh come on. That's sacrilegious, isn't it?
Mr. Teague: Oh, don't worry about it. After all, it's not an ancient tribal burial ground. It's just people. Besides, we've done it before.
Steve: When?
Mr. Teague: In '76, right down there.
Steve: Cuesta Verde?
Mr. Teague: All three hundred acres. Well, let me tell you, it was quite a deal!
Steve: No, no. But I never heard anything about it, though.
Mr. Teague: That's not the sort of thing one goes around advertising on a billboard or on the side of a bus. What are you worried about? Friends and relatives can visit their loved ones in Rockston Memorial Park - it's only five minutes further, for Christ's sake.

Dr. Lesh recommends a professional exorcist and "extraordinary clairvoyant" named Tangina (Zelda Rubinstein), a midget-sized, plump woman: "She's cleaned many houses. Her gifts have been documented..." The psychic's first pronouncement reveals her extra-sensory powers: "This house has many hearts." She confidently and calmly comforts Diane: "Your daughter is alive and in this house." Tangina asks about "the last incident of bi-location," and bolsters the strength of Diane - the mother-figure:

Tangina: I'd give my strongest feeling. The point of origin is in the child's closet upstairs.
Diane: Yes, I believe that too.
Tangina: Honey, are you gonna be strong for me and for your daughter? I can do absolutely nothing without your faith in this world and your love for the children.
Diane: I will, believe me I will.
Tangina: And will you do anything I ask, even if it comes contrary to your beliefs as a human being and a Christian?
Diane: Yes, I promise, please.

In a spellbinding monologue, the eccentric Tangina speaks of Carol Anne's relation to the unseen spirits that have pulled her into their sphere:

There is no death. There is only a transition to a different sphere of consciousness. Carol Anne is not like those she's with. She's a living presence in their spiritual, earth-bound plane. They're attracted to the one thing about her that's different from themselves. Her life-force - it is very strong. It gives off its own illumination. It is a light that implies life and memory of love and home and earthly pleasures, something they desperately desire but can't have anymore. Right now, she's the closest thing to that, and that is a terrible distraction from the real light that has finally come for them. Do you understand me? These souls who for whatever reason are not at rest are also not aware that they have passed on. They're not part of consciousness as we know it. They're in a perpetual dream state, a nightmare from which they cannot wake. Inside this spectral light is salvation - a window to the next plane. They must pass through this membrane with friends who are waiting to guide them to new destinies. Carol Anne must help them cross over, and she will only hear her mother's voice. Now, hold onto your selves. There's one more thing - a terrible presence is in there with her. So much rage, so much betrayal. I've never sensed anything like it. I don't know what hovers over this house, but it was strong enough to punch a hole into this world and take your daughter away from you. It keeps Carol Anne very close to it and away from the spectral light. It lies to her. It says things only a child can understand. He's been using her to restrain the others. To her, it simply is another child. To us, it is the Beast. Now let's go get your daughter.

Three ribbons, handkerchiefs, numbered tennis balls, thick rope, and bath water are prepared. Carol Anne is summoned by her mother's voice and then by her father's authoritative, angry demeanor. Against her own instincts, Diane commands her daughter to "run to the light, Carol Anne. Run as fast as you can...Mommy is in the light...Mommy is waiting for you in the light." The door to the bedroom is opened - blinding blue strobe-lights flash from within the closet. Tangina instructs Ryan to "go downstairs and wait by the target" and Steven to "give me the tennis ball marked number one." She discovers a passageway between the closet through the living room ceiling when she tosses the ball into the closet and it returns by way of the living room.

Steve tosses a handful of rope into the closet - the end of it, covered with pinkish slime, falls at Ryan's feet from the living room ceiling. Although Tangina volunteers to go in, the rope is tied around Diane's waist. With Steve lowering her into the upstairs closet, and Ryan pulling the other end of the rope in the living room, Diane is guided through the closet into the channel of the twilight other-world. A spell is cast by the clairvoyant: "Cross over, children. All are welcome. All welcome, go into the light...There is peace and serenity in the light."

In one of the truly scary moments in the film, Steve panics and pulls on the rope - the hideous, giant head of the Beast roars at him from the closet door - he drops the rope holding Diane and the enraged creature retreats. Clutching Carol Anne in her arms and grasping the rope, Diane plummets from the ceiling to the living room floor - both are covered with a reddish, slimy, jelly-like afterbirth. She has successfully plucked her daughter from the jaws of death. The bath water revives them. Tangina prematurely and smugly boasts to the video camera recording the events about the extraction:

This house is clean.

A moving van is being packed with boxes of the Freelings' belongings - they are moving away permanently. Another inanimate object almost 'kills' Steve - he stumbles over Robbie's bicycle in the front yard. Diane has white curls of hair at her temples from the harrowing ordeal. They are "leaving tonight for sure." Diane is taking a soothing bath and the younger children rest in the serene, silent and peaceful house.

The paranormal events commence again: the frightening, grinning clown doll vanishes from its customary chair, grabs Robbie, pulls him under the bed and attempts to strangle its owner. Another invisible spirit traumatizes Diane - the malignant force bounces her on the bed, hurls her against the bedroom wall, and drags her across the ceiling [a macabre version of Fred Astaire's incredible dance on the ceiling and walls in Royal Wedding (1951)]. The closet comes to life with more virulence than before - there's oozing, gooey slime, white-hot light, and more sucking power. The Beast bars Diane from entering her children's bedroom door - she screams: "No, don't touch my baby."

In a memorable terrifying conclusion - a finale of nightmarish horror, the distraught mother runs outside into the yard for help - in the rain - and makes a wrong step. She slips into the muddy, excavated pit next to the house, dug for their swimming pool. She slides down the slippery slope into the dirty water - she surfaces with skeletal faces of corpses (with silent, screaming expressions) rising behind her. Coffins, with partly decomposed, rotting corpses, implode from beneath the ground.

Diane scrambles to escape, but the mud prevents her from getting a grip, and she slides back into the macabre swimming pool of death. Her neighbors pull her out, and she rushes back upstairs to her children's bedroom. In the corridor, the perspective of the passageway lengthens, and as she runs toward the bedroom door, the distance increases. With a desperate assault, she finally reaches the room, which is being sucked into the grotesque maw of the Beast. By grasping hands in a chain, she pulls her young children from the threatening jaws. More coffins explode through the floor of the house and in the yard, opening up and exposing more skeletal remains.

Steve condemns his boss for lying to him about Phase One of the Cuesta Verde Estates development:

You s-o-b. You moved the cemetery but you left the bodies, didn't ya? You s-o-b. You left the bodies and you only moved the headstones. You only moved the headstones. Lies. Lies.

[The vengeful ghosts are upset because the house (and the entire subdivision) was built by crooked, greedy land developers over the site of an "ancient tribal burial ground" - a sacrilegious violation of their sacred space - the cemetery was moved with its headstones, but the bodies were left in the ground.] The Freelings recover Dana (who screams "What's happening?"), reclaim their family, and escape in the family car with the dog through a dangerous gauntlet of obstacles as more skeletal corpses burst from underneath. There is nothing left on the plot of ground that was the Freeling's house after it implodes. They drive by the ironic sign: "You are now leaving Cuesta Verde - We'll miss you!" Another hotel marquee at their Holiday Inn announces: "WELCOME DR. FANTASY & FRIENDS." Tired, the evicted family finds refuge in a room there. Steve shuts the door - after a moment, he opens it and shoves the room's TV out onto the balcony for the night.

After the credits have played and blackness fills the screen, giggling children's voices fill the soundtrack, and then slowly diminish.