Glad you asked before you went to itunes and clicked update.
No, you cannot just update.
Your iphone will lock and your sim will not work with it.
It needs work and a custom JB IPSW to maintain your unlockable baseband and restore in pwned DFU mode. Then you will need to install ultrasnow from cydia to unlock. If any of that is confusing and sounds chinese dont attempt anything unless you know 100% what you're doing and getting yourself into.
Your iphone is not unlocked forever and you cant just update that easy whenever theres a new iOS version out.
Follow this bro. http://www.iclarified.com/entry/index.php?enid=18932
This tutorial will show you how to create a custom JB 5.0.1 IPSW that doesnt update your baseband.
You will then restore to that JB ipsw using itunes. Once done restoring to it you can open cydia and install ultrasnow to unlock.
You might need an official sim in order to activate it cause I dont think redsnow hactivates.
You can use any old inactive AT&T sim if your iphone is locked to AT&T or borrow someones sim for a minute. Stick it in the phone and then plug it to itunes to activate it.
I ended up restoring the phone. Now I am uncertain of what to do next. It says to insert a valid sim card with no pin lock to activate the phone. I am assuming this is to be an at&t sim and I will need to have the phone unlocked and jailbroke again?