1) Yes, if you're rooted with a 100% stock ROM and recovery, you CAN encrypt.
2) Sort of. It might mess up the encryption. Mine got confused thinking it was still encrypted, but couldn't mount the partition after Odin ran. To fix it, boot to STOCK recovery using the hardware keys (vol+/home/power), and do a factory reset from in there. Note that CWM/TWRP etc will NOT work to fix this issue. It's something to do with the changes Samsung made to the encryption code.
3) Nope. Password only. In theory, it might be possible to do an Xposed module, but I didn't find a good place to hook in to the process. If they would separate the encryption password from the device lock code, this would be easy. I ended up using the No Lock Home Xposed module, which lets you switch to swipe screen lock when you are connected to particular wifi/cell/BT devices.
I'm actually running without encryption now. It makes custom ROMs difficult. I believe if I were running an AOSP derived ROM it would be fine, but using modded stock stuff causes issues. Make sure you do backups to SD or a computer. If something goes wrong with the encryption there is no way to recover without a full wipe, which kills everything on the internal storage, including /sdcard. The external SD card is not affected, unless you encrypted that as well. I like the extra security, but the implementation sucks and is buggy.