My two cents: if you have the money to spend and it isn't pushing you to the limit - the party is really fun and not too scary (the parade does have some parts that may scare some kids - but it is also very cool). However, we went years ago when it was a lot cheaper and were piggy backing off of a trip for work for me so we only spent one day in Magic Kingdom and then on another evening when I was done with the conference we headed to the party. My boys were the same age (7 and 4) and really enjoyed the trick or treat aspect, parade, night rides, and glow in the dark path that lit up their costumes. Neither of my boys liked people dressed up - I have pictures of little boys in tears by clowns, Santa, etc. The youngest wouldn't even budge at a museum because of the realistic wax figures in the entrance rotunda. So, I understand your concern. If you think it will be an issue - I would save your money.
BUT, if I didn't have plenty of extra money to spend, I would stick with just enjoying the park up until close. There is so much to see and do that you really don't need to add the party. If the fireworks are important, as PP stated you can watch them from a variety of other locations including the beach at the Polynesian and the music is even piped in (you don't have to be staying there to go sit out on the beach). A favorite "break" spot for us when our kids were little was Tom Sawyer Island. The kids could just be kids and run around and explore - once on the island - no lines to wait in and plenty of room for kids to move. Two other great escapes are the People Mover and the Carousel of Progress - nice rides to relax, sit, and just take a break.
My biggest first trip tip: focus on making memories with your kids and enjoy what you get to do - don't focus on what you miss. I know we missed rides because my kids wanted to stay on Tom Sawyer Island much longer than we had planned. I have great memories of that time and really couldn't even begin to tell you what we missed! (And I've had kids sleep through fireworks too! - and now we just laugh about it)