How fun!!! The best thing to do is stay on property. When you stay on property all the perks you get is more cost conscious than staying off. The extras you get when you stay on property are:
Transportation from the airport and back with luggage delivery. This is awesome because you just go find your bus and someone else gathers your luggage and delivers it straight to your room.
When you buy souvenirs you don't have to lug all your bags around, they have a service that will deliver all your bags back to your room. No one enjoys carrying their purchases on rides.
Also, transportation around the parks straight from your hotel on property is so nice. Other buses for outside park hotels I've notice don't run as often or as late into the evenings.
Every property I've stayed at in WDW has been a blast. I've stayed at the budget resorts which have been great, lots of big bold colors for a 4 year old to be in heaven. I've also stayed at top of the line and enjoyed those too. If you family enjoys a rustic atmosphere shoot for the Wilderness Lodge, they even have cabins you can rent. Or if you want a lively atmosphere then try The Boardwalk, lots of fun there.
I have a child with food allergies so in the past I was not able to purchase the dining plan, but everyone who gets the dining plan swears that is the only way to go when eating at WDW.