You are quite right to stand up to his mother. Some people find it very difficult to let go of their children, and they make nasty mothers-in-law. However, she came into your life for a reason.
You need to learn to be both firm and loving, and at the same time your fiancé needs to stand up to her.
You are both adults, even if he is older than you, and you both know what you want. If you were a teenager she would have had a point, but you are an adult and you know your own heart.
I would say the first step is for you and your fiancé to have a heart-to-heart talk and decide what you want for yourselves. If you want to live together, that is your decision, not hers. If your fiancé keeps giving in to pressure from her, then you need to ask whether you want to marry him, or marry him and his mother. Rather have an ultimatum and possible disappointment now, than start your marriage with doubts and entering a war zone that may get worse when there are grand-children.
Once you and your fiancé have agreed on what you want to do, leave it to him to stand up to his mother, and get on with putting your plans in action.
And no, you don't need to be rude. You can be firm and polite, and if the situation turns into a confrontation and voices are raised, ensure that you do not raise your voice, and walk away from the situation. If you continue to act like an adult, his mother will finally realize that you are one, and that she needs to let go.
His mother can express her wishes, but they remain her wishes and do not need to become your reality.
Also very important - love her for who she is, and accept her. She may choose not to change and be very unhappy, but you can choose how you view her. If you allow her to gain the upper hand, then you will encounter someone else like her in your life - for example a person at work or a friend, that disappoints you.