Another Question I had was if I decided to do the MacMini, does it matter how fast it is if I am just running iTunes? Reason I am asking is because do I buy a new low end one from Apple or buy a used Old one on eBay. (Like the old 1.6GHz, 1GB Ram)
If this is all you'll be doing with the Mini, then even even a CoreDuo or G4 would suffice! Assuming Apple don't release a major update to iTunes and the ATV software that only works on Snow Leopard.
I have the exact same setup: an external HDD with videos on it, which were added to iTunes. iTunes then streams stuff to my Apple TV.
It works brilliantly on my new 2009 Core2Duo Mac mini, and it worked just as well on my 2005 G4 mini.