I would say something to your MIL like what vickyd just said. How you believe it is too close for comfort. That you are working on reconciling and the further away the better. The fact that there is a child doesn't allow you to have no contact, but having them live in that house just amplifies the contact, and puts her more into the family which is what you are trying to stop.
I'm sorry that you even have to deal with this. The hardest thing for me to deal with is people that just don't reason well. You can talk and explain all day long, and you know it will never sink in. If that is the case with her, go through your H. Remember, he should be doing everything for you to repair this marriage right now. His OW should NOT be living in that house. The fact the MIL even offered IS awful, you need to tell her your feelings, but you may have to be ok with ONLY telling her your feelings without an understanding on her part.
