1.
Yes you can migrate from a Time Machine backup. My preference is to make a bootable clone so that I can restart from the old OS if required, but Time Machine should be OK too.
2.
If you do not migrate user data then you simply have a Mac with none of your old files. The 'user data' is everything inside /Users/USERNAME, it is also called 'Home' for the logged in user (use 'Finder, Go Menu > Home' to examine the contents of your user account).
That includes everything that you save, and edit (under normal circumstances). All of your iTunes data is in the Music folder, all of the iPhoto data is inside pictures for example. The general idea is to store everything you personally need inside the user account.
The Library is where all your preferences & settings & supporting files are kept, there is a hidden one inside your home folder. That can occasionally cause issues when migrating (old settings can conflict on new OS's) however these are quite rare in my experience - the benefit of having all your old personal data usually outweighs the risks.
Note: migrating Applications is risker since it also copies many old supporting files across the entire OS.
Your plan seems fine heres a few notes…
If you are worried about Terminal use http://diskmakerx.com to make the USB bootable drive instead, either will work. The red replacement looks correct.
I don't know the full HD removal procedure for your model but it looks OK, iFixit guides are good for a confirmation & additional pictures…
https://www.ifixit.com/Guide
Just remember clean hands, clean work area, and discharge your static on something that is grounded 🙂.
Once the OS is installed you will have Apple's default apps, from the ones you mentioned…
iTunes, QuickTime player will be installed by the OS.
iPhoto, iMovie, GarageBand are part of iLife, they are not part of 10.10. You will need to reinstall them from the App store. There are different ways to get them, you may have purchased in the app store or upgraded them from a version that ships with the Mac. Check they are in your App store account, if not it may be another purchase or time to look for older iLife install DVD's (older versions are less compatible).
Grab the other apps from the developer sites, it's a good time to review that they are 10.10 compatible, stay away from 'download.cnet.c o m' & other 'software download aggregators' they have a habit of bundling junk (mostly adware) into installers.
You can move your songs & other files back by hand if you wish. I suspect you may want to move all of your iTunes, & iPhoto data in one go. Bear in mind some settings are preferences (stored in your home library) and some data is stored in the application database, like the iTunes library or iPhoto. Migration assistant take away the issue with knowing where all these supporting files are located (and which ones are important).