Setup Domain at home good or bad

Setting up an intranet domain is fine. Your server has to be a domain controller and that requires that you first configure a DNS service. Your DNS should use your ISP's DNS servers as forwarders if your computers will have access to both your server and the Internet.

Nothing wrong with a domain at home, I run one and it's just me and my other half living there.

Advantages include some increased security, lots of learning opportunities and bragging wrights mainly.

Disadvantage, cost for extra hardware/software and power bill, increased exposer to single point of failure ( I run 2 DNS/ Domain controllers for this reason)

Yeah, I already have a computer running 24/7 as a file server, and i would just add the Active directory to it.

Where would you suggest to put it on the network, right now I have it plugged in as a normal computer would be, with a router in between the internet and the rest of the network. Is that how it is normally done, or is the server directly to the internet and everything else goes through it.

It has to be connected on the same network as all other systems. Just leave it connected as is (I presume that it's connected to a switch or a router), add the DNS and the Active Directory roles and configure them. Before doing anything else, make sure that you use a static IP address. You can't use DHCP for a DNS/AD server.

The OP is running Windows Server 2008.

Yeah it is running server 2008, so i am ok there