If I already jailbreak & unlock the phone to 4.2.1 just now and I "restore as a new phone." Will I have to jailbreak & unlock and restore to 4.2.1 all over again??? I read that you lose 500mb of space if you restore from backup? So confused as to what option I'm suppose to select in iTunes

You won't have to jailbreak and unlock again.
The rest of the answer depends on what iOS version your backup was from.

If it was an iOS 4.x backup then you should be safe to restore from backup.

If you have an 8GB phone and are very focused on saving space, you will get the absolute maximum space by setting iPhone up as new. However as soon as you run Cydia for the first time it will "relocate" some files from the system partition to the media partition. This will swallow up some of the "extra space" you gained from setting up your phone as new.

oh okay thanks I setup as new phone already.