Been there, done that. You are not overreacting at all. It's wonderful that she is willing to watch your son for you and your husband so he doesn't have to go to daycare. However, she should respect you and her son enough to follow your rules and routines. As for her advice, ignore it. Just because she gives it, doesn't mean you have to take it. She can only take your baby out of your arms if you let her. Don't make excuses, just say, "I'm holding him now - when I'm ready to pass off, you'll be first in line."
In the past when my mother in law didn't follow our rules, I tried to talk to her myself to no avail. My mother in law took it the wrong way, even though I carefully thought out what to say so I didn't seem rude. My only saving grace was letting my husband talk to her in order to explain and WRITE DOWN our kids schedules, what they can and cannot do/or eat. This is the only way she would do things our way. My husband even had to sit her down and explain that things are different now than we she raised him and we are doing what our pediatrician has told us to do. (She gave our first born cottage cheese at 3 months because she thought she was hungry !?!?) He also told her that if she couldn't or wouldn't follow our rules, we would have to find someone else to take her place. We were prepared at the time for this to happen if she backed out.
My philosophy now is I'll handle my mother, let my husband handle his. This is the only way it has worked for me. Tell your husband how crazy she makes you by not following your instructions, and that it's his turn to tell her. Just be prepared that if she still doesn't follow your routine, you'll have to find someone else to watch him. YOU are his parent and YOU hold the trump card!
Good luck and be strong. Mother in laws are very intimidating once you have that first baby! I have lots of stories I could share! I'll be thinking of you.