The second rule means the Blacksmith won't upgrade your gear immediately. Once you have the item back, you can reinvest those enchantment points in the same way, mix things up, or use them on a different item. The first rule means that any enchantments you've spent points on on the item you wish to upgrade will be reset, and those enchantment points will be returned to you.
Upgrading an item will instantly return any invested enchantment points.Using the Blacksmith is very straightforward, but there are three essential rules that the Blacksmith will lay out for you the first time you ever use it.