DAUGHTER AND FAMILY, STAY OR GO?
While it's nice to be able to help your children, it doesn't appear that this arrangement is helping anyone. In fact, you may want to ask if you're perhaps 'harming' her.
Here's why.
First, the telling component is contained in the first three words of you question: "Daughter and family." Your daughter has a family of her own ... and this is apparently her second family, as you've mentioned a child from a previous marriage.
Second, you're describing arguments and strife which indicate that this situation is not suitable for the parties involved. Yes, it's normal for people to fight and have disagreements, but you're describing having to displace your other child, having "really big fights", and I think most importantly, you took the time to say the fights were "nothing physical", indicating that you hold some fear this might happen. If you were completely unconcerned that any member of this situation has the capacity for physical harm, you probably wouldn't have felt the need to bring this up.
It is curious that you say the need for money regarding lawyers and the child "could wait, but she wants to do it now."
Seems like your daughter wants a lot. She wants to move in with her parents so she "can save to get their own place." (A lot of people would like to avoid paying rent or a mortgage. What happened to saving wisely, living tightly and doing things on your own?)
She wants to stay in the basement because it's easier. (A lot of people would like to hide in a basement and not extend themselves to do what's needed to make things work. It, uh, takes 'work' to make it work.)
She wants to "inflict" what sounds like a lot of stress on her "loved ones". You don't identify the communications issues between your husband and your son-in-law, but it really doesn't matter. If they can't or don't or won't get along, she needs to take the adult initiative and say, "thank you, but this isn't working for any of us", and move on. She should insist on this and not be a hanger-on just to save money.
Finally, she wants her son "now." Hmm. Without knowing the circumstances, but in listening to all of your daughter's behavior, it seems like it might be wise to let a little time play out and NOT encourage her to get her child immediately. I see no reason for you to foot the lawyer's bill, and the very fact that she seems to have her hand out at every turn, suggests that she may have some growing up to do before taking on another child. Harsh, but perhaps true.
From what you've said, perhaps you're not helping by being so involved in your daughter's life. You may actually be hurting her by taking away valuable opportunities for her to learn and grow. She needs to understand how to manage frustration, regardless of how difficult it may be.
It's time for her to grow up and not only take responsibility for her actions, but to be accountable. She is accountable for the outcome of her choices, not you or your husband.
Good luck.
Marie M.
On-Line Life & Weight Management Coach