Not sure to your first question as I don't use Windows. I don't know how
Windows 7 will react to any changes that you make. Some OSes such as OS/x
will not share a drive, but require that you install another OS to a
separate drive. As long as you are sure that Windows 7 will not baulk at
this then I say go ahead.

/home is a mount point that you set when you install Ubuntu. You can choose
to format and encrypt as you see fit. To do that right click on /home in the
graph or list and choose edit. Choose to use it. Then choose the mount point
as /home and format and encrypt if you want. When you choose your user name
it will create a user space under than name. If one already exists then you
can choose to re-use it. Obviously if you choose to format it will destroy
any data on the drive.

My preferred format is ext4 as it is faster and is reliable. Btrfs will be
the format of choice soon, but ext4 is your best bet now. The advantage of
ext3 is that it can be accessed from distributions with older kernels,
should you have any. There are no advantages to ext2, IMO.

Follow the guide, although I would just use gparted from the installer
rather than in the menu, by choosing the last installation method in the
installer, custom or manual (I forget the exact wording). There is nothing
wrong with pre-partitioning with gparted.

The biggest worry is on the Windows 7 end. Backup any data and be prepared
to re-install Windows 7 should it be necessary. Also Windows likes to be on
the first partition. I am not sure if that is the case with Windows 7, but
it is a good idea anyway.