Hotels really depends on how much money your family wants to spend. Disneyland has three on-site hotels: the Disneyland Hotel, Paradise Pier, and the Grand Californian. If you want to go all out and money is no object, the Grand Californian is the most amazing hotel I have ever had the privelge of staying at. Disneyland Hotel and Paradise Pier are a little less expensive than the GCA and fairly nice themselves.
Unlike WDW, staying off-site is really no less convenient than the on-site hotels. Many hotels are right across the street from DL, and a lot less expensive than on-site hotels. If you're on a budget, off-site is probably the way to go. I would suggest the Park Place Inn (it's a Best Western) or Hojos, which I've never stayed at, but have heard wonderful things about.
Personally, I prefer Disney owned hotels because... well, they're Disney and it makes a vacation more special. But staying across the street can be just as fun.
Wow that was pretty dense... did any of it make sense?