Last question first: The condition of the yarn after frogging/tinking/unkintting/ripping out will depend on the yarn, how textured it is, how delicate it is, and so on. Most yarns can be ripped out and reused with no ill effects, but not all. And you didn't mention what yarn you're using.
First question: It's hard to say whether or not to rip out or how much to rip out without knowing (1) what pattern you're knitting (2) where the error is or (3) what the error is. It's possible that you can repair the error without ripping it out.
If, for example, you dropped a stitch in stockinette, you can just ladder the stitch up to your last row worked. That stitch will be tight, but eventually the fabric will absorb the stitch without it being noticeable. If you made an error in an intricate cable pattern or lace pattern, you may not be able to make an invisible repair.
However, you may not need to rip and reknit the entire project. I have taken a free needle and, in a row below the error, picked up every stitch, from right to left, to provide a "stop" for the rip-out process. Then I ripped out just the rows that include the error. When doing that picking up, I like to use a circular needle so it doesn't matter if I selected a right-side or wrong-side row, I can begin reknitting at either end of the needle. Then identify where you are in the pattern and start from that point (rather than ripping it all out and starting over).
If you do decide to rip out, remember--you're in good company. Every knitter rips out sooner or later, some of us more often than others, even when we're experienced (ask me how I know that).
Addendum: Zoomy appears to be a heavy bulky-weight smooth yarn. It should do well if you rip it and re-knit the pattern. Advice on rewinding the yarn after ripping: If you have a ball winder, use it. Otherwise, wrap loosely over four fingers about 10 turns. Rotate 90° and wrap loosely about 20 turns, keeping the fingers of the hand holding the ball between the ball and the yarn to keep it loose. You want to be careful NOT to put tension on the yarn as you wind it. Continue until all the yarn is wound. Here's a YouTube video on how to wind a center-pull ball: http://www.youtube.com/watch?v=Nx8kfwPCnJM .