If your marriage (and your sanity) is truly in jepordy, then you have to do whatever it takes to fix this situation.
I would suggest first discussing all of this with your husband. Let him know exactly how exasperated you are with situation, and that you cannot continue with things the way they are, and stil remain metally and physically healthy. He cannot expect you to put up with this type of behavior from his dad. If you can get him on your side, and agree that things should change, then have a "family meeting" with your father-in-law, and get everything out in the open. You sound intelligent and well put together, and I am sure you can figure out the best way to divulge your feelings without being disrespectful. Let him know that you don't mind having him in the house because it's wonderful he gets to spend so much time with the grandchildren, but there are some things that he could do to help ease the stress you are feeling. Even if he doesn't like what you have to say, it's better to get everything out in the open.
Worst case scenario, if he still refuses to comprimise and follow the rules, you take the children and move to the extra house until your husband steps up and deals with the situation.
When it comes down to it, your family, your health and your marriage should be the most important thing to you and your husband, no matter who else gets their feelings hurt.
Good Luck with this!