Hi pink, I'm in a very similar situation to you, in that I too live with my in-laws a very long way from home, and had my second baby in their house. There are differences though in that our relationship has historically been very strained, good news though, having the baby has actually made us closer! This is a bit long, but I hope my story will help a bit...
When ds was born 3 years ago we were in our own house, we lived up north, in laws down south...MIL & BIL & SIL all headed up north when they heard I was in labour, FIL that evening...MIL settled in to our house for the week and TOTALLY TOOK OVER...she was at the hosp all day, everyday, I was in for a few days as had had hard pregnancy and tough birth...I went home on day 4, day 6 she invited all her friends to our house for dinner and to see the baby! You're getting the idea...
DH was a bit do-lally (it seems alot of new dads are, and didn't see the prob)...Basically MIL went into over drive, she was delighted with her new grandchild and wanted to savour every minute, she knew she was leaving so she wanted to take it all in...DH didn't want to leave his mum alone at home (fair enough but trying for me) and just didn't get that I needed space. MIL was just too delighted with DGS to notice.
This continued til I started putting some ground rules...I was never thanked for them and was viewed as unreasonable...caused alot of arguements with dh til he finally got it!
Fast forward 1 1/2 years, in-laws moved overseas to work, dh decided it would be a good idea to do the same...we end up living 'short term' in IL's house. Huge arguements...MIL & FIL are busy being doating grandparents, and spoiling DS to crazy degree, takes along time but they finally realise that their role has to be slightly different when we live together. It was horrid but DH & I were united and that was what made it work.
Fast forward another 1 1/2 years and a catalogue of mishaps and just the plain funny...I'm about to give birth still living in IL's house...
In all honesty 2 months before I gave birth my relationship with my MIL was as bad as it had ever been...I was back in UK with DS and didn't want to come back,I came back as wanted DH there for the birth...I put all the arguements behind me and realised to survive I had to be accepting of my MIL...she's not a bad woman just different from me.
She was there at the birth (We didnt plan it that way, I didnt want her there but i'm glad she was, she was FAB!) SHe was there for DS, and she gave me more space this time, in part I think as she knew we weren't going anywhere...
I had to be more relaxed and more accepting of help with DD as DS is still very demanding. Whilst I was putting DS to bed, for example, MIL would put DD to sleep...DD had horrid colic, I'd be up all night with her, and mil would play with her in the day to let me sleep.
I am THE controlling mum, It is my nature to want to do EVERYTHING perfectly, and without help, but, I took it for my kid's sake. I was scared that MIL would be closer to DD daughter than me...I was a little down because of it...BUT DD is now 18weeks, about 4 weeks ago SHE decided that SHE wants her mummy, she still loves her granny but noone is like me to her. Everyone comments about what a mummy's girl she is.
What I'm trying to say is that it can be VERY GOOD to have in laws about, but you have to be open to help. Don't be intimidated by it, noone else will ever be a mother to your child.
Whilst I'd say it is a good idea to talk to your MIL now, I'd say it is more important to talk to your other half. Make sure he understands your needs and fears and what you will and won't tolerate and make sure he will support you in achieving this...I'd also say that it might be a good idea to have him there if, and when, you talk to your MIL. Every family has it's own way of working and he will understnad his mum much more than you can at this stage. He has to be your closest ally and protector. (I wouldn't have the chat with your mum there as there is a risk her tiger instict will kick in and she will want to protect her little girl! hehehe)
Tiger instict - YES it's there, good God it's strong with your PFB, it took me a long time to learn this lesson, I knew it, but to really accept it...
You don't have to protect your baby from your in-laws (sadly I have to add - in-most cases). No one beyond you and your DP will ever love and protect your child in the way that your mum and MIL will. If that love is on offer, it is a VERY GOOD THING, accept it (however hard it may be sometimes)!
Whilst you may not see eye to eye with your MIL in every instance, she will I'm sure appreciate what a good mum you are...she may not see it right away, and her 'help' may be a little trying, BUT she is trying to help...the nicest compliment I have had was when my MIL said I am a good mum! - note it took her nearly 3 years and 2 kids to say this!
Oh and try to remember that you too will be a MIL one day, your MIL will probably have forgotten just what it is like to be a new mum (sad but true), but I have my secret hope that i'm as involved with my dc's kids as my MIL is, I hope if I treat her well, in time my DIL and SIL (if kids choose that) will have a good relationship with me
It can work if you make it, just try and relax as much as possible, and as another poster said, get your own place ASAP, but appreciate what your In-laws are doing for you right now.
Oh yeah, join a mums and babies group asap, it'll get you out of the house and get you your own group of friends! V. IMPORTANT
Good luck, it'll be great...try not to worry too much and enjoy your lo!