You will also need to make sure that the power to the lighting package is stepped down from full track voltage, or else change out the low voltage bulbs in the locomotive for 12v bulbs.  You may need to modify the frame to make room for the decoder.

I suggest checking out the TCS decoder installation in this locomotive here: http://www.tcsdcc.com/public_html/Customer_Content/Installation_Pictures/HO_Scale/Life_Like/Proto_2000_E8_9/Proto_2000_E8_9.html  It looks like the motor is already isolated, at least in the model they used as a reference.

As for the "best" decoder, that's a bit of a personal preference.  I prefer Digitrax (for the price and reliability) or TCS (for the price, reliability and idiot-proof warranty), but it frequently depends on what is available at the time.  For power only, I would not spend much over $20 for a decoder.  If it were my model, I'd probably put a TCS M1 into it, with a Digitrax DZ125 being a close second.