What is the downside for the free lodging? Will you be free to come and go as you please, or will your family feel obligated to follow your friend's schedule or plans?
We have chatted here before, and if your finances are tight, by all means, stay at your friends. You are looking at Deluxe vs value, and frankly, there is a middle ground that gives you some of both worlds. I can only tell you that if I had my choice, I would take a hard look at my budget, my plans (and I remember you have a jam-packed day every day) and how far I could reasonably stretch in order to say onsite. (Or even offsite but not in someone else's home) There is a lot to be said for coming and going as you please, using WDW transportation. You can change your mind, leave as early or as late as you wish, shower at your convenience, whatever without worrying that you are impacting someone else.
I don't know Danny- you said that this is a pretty once in a lifetime trip for your kids. While I would never suggest that you spend more than you are comfortable spending, I would suggest that you give some serious thought to the ramifications of being too thrifty. So, if it was my family, we would stay onsite. I would not stay with relatives, friends, or anyone for that matter. Not on vacation.