Self-hosted is infinitely better as you have more control over Wordpress than you would when you're hosted with them. For one thing, you won't be able to change the source code on a hosted Wordpress if in case you need to (like for custom scripts, etc.). You're also limited in the kind of plugins and themes that you can install in a hosted WP (only approved plugins and themes can be installed). Also, if you have a website that is more than just a blog (ie. with forums, galleries, etc.), then you won't be able to integrate your WP hosted blog with the rest of the site. All that limitation will be gone if you self-host your own Wordpress installation.
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