Your free hosted site is http://smithtownhome4sale.wordpress.com/
If you purchase a domain name upgrade, your site will still be hosted here on WordPress.com.
Think of the domain upgrade like buying a sign for your house which says something like, "smith's great palace." So you can tell people to look for the sign on the street which designates "Smith's Great Palace!!"
Your mailman will still deliver to "smithtownhome4sale.wordpress.com" because that is your "real" address, where you actually live (where you are hosted).
But having a domain name upgrade is like putting a sign on your front gate saying "NAME HERE" (smith's great palace). People will find you with the new name, even though your house is still in the same place (and the old regular address will still work). The new sign makes your house easier to remember so easier to find.
Does that make sense to you?