We've done Christmas/NYE at Disney the past 10 years. Early on, we were so enthusiastic about NYE in Disney. The past two years, we didn't even go into the parks. That's personal preference - it's crazy crowded but still enjoyable. My dad wasn't in the best health last year and we simply weren't feeling it two years ago, so we had a great dinner at Yachtsman and watched from the boat launch.
Anyway - staying on-site allows you to go later if you want. If your goal is JUST to see the fireworks, then go early, stake out a spot, and enjoy the fireworks. If you wanna get on rides, well then, I hope you have FP's.
Taking a break is a good idea. NYE is a different animal but during Christmas week, MK doesn't get crazy crowded until ~10-11am. The park is gonna be so crowded that you'll wanna leave and come back. I'd almost recommend grabbing a quick bite to eat at one of the monorail resorts, relaxing there for a while, then going back.
Going back to the hotel also gives you a good opportunity to grab layers -that way you're not carrying them around all day or if it suddenly gets cold at night.