I am going to try egoshin's recipe.
Before doing this I hope egoshin and those who are using this method could tell me if there is anything wrong in my current setup that I have to deal with before going ahead. I will surely read all the posts you would refer to. Thanks for your answers in advance!

The current setup of my N900:
- is running PR1.3
- is running titan's power-kernel v42
- is being overclocked to 1Ghz
- is using SavageD's script from http://talk.maemo.org/showthread.php?t=63997
- has installed BackupMenu 0.56-1 and has already made a backup image for the whole sysem
- /home is 27GB, /home/user/MyDocs is 2GB after exchanging the space
- /home/opt mounted as /opt
- has done nothing special on the rootfs and with the installed packages now it has 30MB left
- not having any issues so far

Some more questions:
- Do I have to uninstall BackupMenu first?
- For the issue that the stock apps like camera cannot find the default folder, is the fix just simply changing the location of the app's default folder?
- Will things in MyDoc be untouched using egoshin's scripts?
- After setting up a new swap partition on the micro sd card, what is the use of the 768MB occupied by the default swap partition?

I don't mind crashing and reflashing, which I have done many times since I got my phone 3 weeks ago. A spare phone is in service so it's not a big problem if the N900 is in the "bricked" state.

Thanks!