I wouldn't recommend using the external as the boot drive. However you can drop the old HD into the external to grab any leftover data you might need.
I highly recommend NewEgg for researching your hard drive. Their user feedback is great. There are some hard drives that may not work inside Macs, mostly notebook computers though, because some of them were not built to handle the vibrations from a faster drive. Your iMac should be fine, but do read the user feedback just in case.