(MONEY Magazine) – BO AND ANA APOSTOLACHE loved their three-bedroom home on a cul-de-sac near Irvine, Calif. when they bought it six years ago. Best of all, they could easily cover the $1,400 monthly payments on their $175,000 mortgage. Over the next few years, as interest rates dropped and their home price tripled in value, the couple refinanced several times and tapped $200,000 worth of equity to pay for home improvements—and a Barbados vacation. By 2005, although they had doubled their loan balance, their payments had increased by only $400 a month, thanks to an interest-only adjustable-rate mortgage with an initial rate of just 3.75%. "It worked fine at first," says Bo. Until it didn't. A year later, their rate adjusted up, adding another $400 in monthly payments, and Bo lost his job as a mortgage broker. Out of desperation, the Apostolaches took a $200,000 home-equity line of credit, in part to help cover the payments, but then quickly realized they were in over their heads. "Borrowing that much was the biggest mistake of my life," Bo admits. "I guess I just got caught up in the real estate frenzy."

The Apostolaches' situation may be extreme, but they certainly aren't the only ones who went a little crazy during the recent real estate boom. Convinced that prices would continue to rise indefinitely, people felt free to supersize their homes; the median size of an American home has increased 16% in the past decade, to 2,227 square feet. Bigger homes, of course, come with higher property tax bills, and they cost more to wire and keep heated and cooled. Meanwhile, lenders churned out new types of loans with low initial payments and, as the real estate market spiraled to new heights over the past few years, loosened borrowing restrictions. Traditionally, lenders had refused borrowers whose debt obligations exceeded 36% of their gross monthly income; during the boom, many lenders accepted debt-to-income ratios of 50% or more, says Don Sprague, a financial planner and mortgage broker in Boulder: "There's a big difference between how much a lender can qualify you for and how much you can actually afford."

Stretching the limits of affordability wasn't a problem when interest rates were plummeting and home prices were zooming. Then, homeowners who had trouble making payments could easily refinance or unload their home for a big profit. That's no longer the case. Recently lenders have begun tightening their standards, and if your home hasn't appreciated, you may not be able to refinance easily. In the meantime, many borrowers who took a short-term low-rate loan or home-equity line of credit a few years ago have seen their payments shoot up by hundreds of dollars a month. And another $1.5 trillion in mortgage debt is up for readjustment this year, according to the Mortgage Bankers Association.

For some, the new realities of the housing market are tough to swallow. When a job opportunity led Kristen and Darren Boucher to uproot from Las Vegas to Des Moines last year, they held on to their former home out of a hope that the formerly sizzling Vegas market would quickly bounce back. But the couple have been unable to find renters to cover the costs and now spend almost a thousand dollars a month to make up the shortfall. They're starting to dig into savings, and Kristen has suspended her Roth IRA contributions. Still, she's optimistic. "My husband is ready to move on, but I am having a hard time letting go," Kristen says.

If you're among the many homeowners now straining under the weight of a too-big housing payment, you're not doing yourself any favors by ignoring the problem. "If you are shortchanging other goals, such as saving for retirement, that's a sign it might be time to rethink what you are doing," says Bobbie Munroe, a financial planner in Atlanta. Instead, try the following strategies to avoid having your home wreck your finances.

• SIZE UP YOUR SITUATION Is your housing stress the result of a short-term problem that could reverse itself soon, such as a layoff or an illness that triggered unwieldy health-care costs? Or does the strain result from a more fundamental problem, such as overoptimism about the real estate market or miscalculation of what you could afford based on your income? The answer will dictate your best strategy (see below).

• IF THE STRESS IS TEMPORARY: The solution may be as simple as rethinking your spending. Munroe makes clients scour six months of bank and credit-card statements for fat-trimming possibilities. Some common items to cut: health-club memberships, vacations and gift-giving largesse. Got a tax refund this year? Try reducing your withholding so you'll take home more money in your paycheck each month. In fact, finding a few extra hundred dollars in your budget can go a long way even if your financial situation isn't likely to change soon.

• IF YOU NEED A PERMANENT FIX: When the problem isn't temporary and you've already trimmed your budget thinner than a slice of prosciutto, you may need to consider more drastic moves. If you have both a variable-rate home-equity line of credit and a primary mortgage, you may save hundreds of dollars a month by refinancing into one new fixed-rate loan that ropes in both balances. A $200,000 fixed-rate mortgage at 6%, plus a $100,000 HELOC at 9.25%, works out to total monthly costs of about $2,230. Roll that entire $300,000 into a 30-year fixed-rate loan at today's rates and your payment will be $1,800 or so, a savings of about $450 a month. That will quickly offset the cost of the refi, typically a few thousand dollars.

You should also consider refinancing if your credit has improved or you simply didn't get a good deal the first time around. If you currently have a 15-year mortgage or are more than 10 years into a 30-year loan, stretching out the payments will save you money now, though you'll pay more interest in the long run. When they got their first loan, Andrew and Lynnette Belyea of Norfolk had little credit history and didn't shop around. After establishing a record of on-time payments, they were able to refinance and reduce their mortgage costs by about $350 a month. "The first time, I rushed," says Andrew. "This time I did my homework and got a much better rate."

• ASK FOR A LENDING HAND If refinancing isn't a solution and you think you might not be able to make your monthly payment, call your lender immediately and ask about a temporary reduced payment schedule, known as forbearance. "The last thing a lender wants is to foreclose; they run the risk of losing money," says Erica Sandberg, a spokeswoman for the Consumer Credit Counseling Service of San Francisco. Keep in mind that your lender isn't obliged to give you a break. But you have a good shot if you can prove financial need and have a plan to get back on track. And you'll avoid a ding on your credit score.

• MOVE ON When no amount of budgeting and strategizing will alleviate your housing stress, it's time to consider moving on. The good news is that if you have owned your home for several years, you may still be able to sell at a profit. The Apostolaches sold their home last year, pocketing $35,000 after expenses. For the moment the couple and their two children are living with Ana's parents. It's a squeeze, but Bo, now working at his father's electronics company, says he thinks they'll be able to buy another home within a year or so. And the couple insist they have learned their lesson. Says Bo: "The new place won't be as impressive as the last house, but it will be one that we can afford."

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A seller saves big by going on her own 58

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HOW THEY DID IT

These homeowners made a plan to reduce their home debt

THE BELYEAS, NORFOLK

Got a New Loan

Problem: They took the first mortgage and home-equity line of credit they could find without considering whether they could afford the payments.

Solution: Refinance. By shopping around, they were able to reduce their rates and cut their monthly costs by $350.

THE APOSTOLACHES, IRVINE, CALIF.

Got Out

Problem: Bo and Ana used their home as an ATM: Their original mortgage payment more than tripled over six years as they refinanced and tapped equity.

Solution: Sell. They sold at a small profit and are living with Ana's parents while they rebuild their savings.

THE BOUCHERS, DES MOINES

Got Real

Problem: They have not been able to rent out their former home in Las Vegas at a profit and are covering the shortfall from their income and savings.

Solution: Understand that the boom is over for now. They're still hoping to find a way to hang on but are prepared to sell.

DON'T GET IN OVER YOUR HEAD

The best time to consider what you can really afford is before you sign on the dotted line

› Add up all the costs.

The total amount of your debt payments—including mortgage, other loans and credit cards—should not exceed 40% of your income, says C.F.P. Don Sprague. And don't forget that the mortgage is not the whole housing enchilada: Property taxes, home insurance, maintenance and utilities can easily tack on another 25% in monthly expenses. If all that goes past the 40% barrier, you can't afford the house. Buy a cheaper one instead. Or reduce other debts before you take a look at real estate.

› Understand the terms.

If you are considering a short-term adjustable-rate mortgage or home-equity line of credit, determine what your maximum payment could be when your rate adjusts. Look for the "first adjustment cap" to find the amount your rate could go up when the loan adjusts for the first time. Plug that number plus your loan balance into the calculator at hsh.com to figure out the monthly nut. If that plus your other debts is more than 40% of your income, that house is out of your reach.

› Create a cushion.

Have at least six months' worth of living expenses saved in case of a short-term snag like a job loss or heating system on the fritz. Got an adjustable-rate loan? Start saving now for that rate adjustment. If you have a $300,000 loan at 5% and a two-percentage-point maximum adjustment in three years, your payment could go up as much as $400. Put away $75 a month for the next three years and you'll be able to cover the increase for six months without feeling like the roof is falling in on you.