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Churches can do whatever the hell they want (so to speak) with regard to whom they will or won't do ceremonies for. In this day and age, most of them are damned grateful that people want to baptize their kids at all, and eager to oblige regardless of whether or not the preliminaries have been observed. If the church is willing to be flexible on this, the rest of us need to just butt out of it and let these people have their day.
Now, as far as our poor beknighted hostess is concerned:
You do not need to bring the whole horde into your home. The way you express this is, "We would love to have you here, really, but it's just not possible. However, I've talked to the manager at our nearby (insert motel here), and she's willing to give you all a block of X rooms together for $XX per night. Here's her phone number -- just give her a call and tell her you're with the Smith family. And give us a call as soon as you check in!"
Notice: "It's just not possible." Psychprof was dead on here: do NOT give any kind of excuse, because they'll have you flat up against the wall arguing your specifics in under 10 seconds. If they start arguing anyway, just keep repeating: "I know, but we just can't manage it. I'm so sorry." "No, I'm sorry, that doesn't work for us." "No, really, it's just not possible." And so on, until they hear the broken record and stop. If they threaten and say they're not coming, say, "Oh, that's too bad. It would have been lovely to have had you there." And leave it be.
The commenter upthread who suggested that you pony up for a room for your in-laws was thoughtful -- but that's not strictly necessary, either, unless you have the funds and really want to. By longstanding custom, people who choose to travel to events like this are responsible for their own expenses. Your invitation outlined the limits of your obligations: you are offering them a ceremony, a reception, and a chance to hang out with their grandbaby. If the offer had also included an all-expenses-paid weekend at your place, you would have said as much. You didn't, so they are presuming -- and taking advantage of your hospitality. You gave an inch, they took a mile; small wonder you're feeling unhappy with the results.
Arranging affordable accomodations close by for the family is a nice thing for you to do. The manager probably will give you a special rate if you're getting several rooms for more than one night. (You may also get a break on reception space, if they've got it.) But you're under no obligation to pay for this. When they decided to accept your invitation; they agreed to pay the bills for coming.
Finally, dear girl, please go to a used book store, buy yourself any book written by the inimitable Judith Martin (who wrote the world's best -- and funniest -- etiquette books under the nom de plume "Miss Manners"), and read them all cover to cover. If you are going to spend the rest of your life connected to this family -- and it appears that you are headed for that fate -- you are going to need everything she has to teach you about how to politely set your own boundaries. Her child-rearing book is also among the best ever written, and would be a suitable christening gift to yourself.