Staying on site can save you rental car expenses if you are willing to take ME from the airport to your Disney hotel and use the buses, monorail and boats to get around Disney property. If you rent a 2 BR DVC you can also save money by eating in your room rather than the parks since all of the 1 BR and larger villas have full size kitchens. You can have all of your groceries delivered (we used prime now and whole foods on our last trip) and it's an affordable way to also eat a little healthier.
If you decide to rent DVC points, you can either do two studios or a 2 BR - the studios will get you more separation from your inlaws and will be cheaper, but it will get you no separation from your child. Whereas if you have a 2BR, you could put the kids in the living room and each couple could have a bedroom. My kids are 2 and 4, so they go to bed much earlier than my husband and I and they also take 2 hour naps mid-day. We always get a studio, so we have to slink around in the dark after they go to bed and hang out on the balcony - having bedrooms will give you more options at times like these. The 2 BR units will also have a washer and dryer in them, which can come in SO handy with little kids. The studios do not have a washer/dryer but do have access to communal washing facilities for free. The studios also just have a microwave and small dorm refrigerator compared to a full kitchen - that wasn't a big deal for us as we made peanut butter sandwiches for light lunches and mostly used the fridge for snacks like hummus, carrots, celery and milk. But if you wanted to do more elaborate meals or had more items requiring refrigeration the larger kitchen might be nice.
Lastly, I will only stay at Disney hotels that have quick and easy access to at least one park - primarily Magic Kingdom. As I noted earlier, our kids take mid-day naps so we spent a lot of time going back and forth to our room - so I will do what I can to minimize that travel time. Our first stay was at Wilderness Lodge, which was a fairly quick boat ride to Magic Kingdom - you can also leave them in the stroller for that when the larger ferry boat is running (the smaller boat requires the stroller to be folded up). Our second stay we rented DVC points and did 3 nights at Animal Kingdom Lodge and 5 nights at Bay Lake Tower. It was so amazing to be able to walk to MK, which is where we spent most of our time. I know you're trying to minimize cost, but places like SSR are really not very convenient to any parks and I wouldn't bother spending the extra money at this stage of your family. BLT, BRV, and CCV are well worth the extra money in my book since most of your time will probably be at MK based on your kids' ages. My kids also loved going to the pool during our mid-day breaks and all of these options have nice kiddie pools/splash pads that are great for the toddler/preschool age group. I can't imagine kids in this age group would do well will full days at the park, so you will really spend a lot of time traveling back and forth if you stay off-site (and you probably just won't come back to the park once you do leave). In my opinion you get much more for your money by staying someone centrally located - you're going to be spending a lot of money regardless which option you choose, so might as well spend a little bit more and get more quality time in and out of the parks. Staying off site seems like a much better value for older kids that can better handle a full day in the parks.