Hi, Brandi! I'll start by telling you I don't ever think it's a bad time to go to Walt Disney World, and over the Christmas holidays is one of my favorite times to go. You are heading down there at one of the busiest time of the year, but the reward is that you will get to see some beautiful and amazing Christmas decorations and holiday festivities.
If you can, I would recommend booking a room on Walt Disney World property. Because it's such a busy time, you'll definitely be glad for things like Extra Magic Hours, which will get you bonus time in the parks that you only get as a Walt Disney World resort guest. You'll also have access to Walt Disney World transportation to your hotel from any of the theme parks, and that saves you from having to worry about parking your car and parking fees.
Whether or not you add the dining is up to your family. My family would never be able to use the dining plan effectively, because we don't eat that much in the theme parks (I've had gastric bypass surgery). It is, however, a GREAT way to have one more piece of your trip paid for before you go, making budgeting an easier task.
Make sure you make your dining reservations as soon as you can. Another advantage to staying in a Walt Disney World resort is that you can make your reservations for dining 90 days before the day you arrive - and make them for up to 10 days of your vacation. That means you have a 10 day head start on people not staying on property. That might work out in your favor - especially for Christmas Eve and Christmas Day meals.