That's really what you do. Ideally you should make a mirror site and database, perform the upgrade and ensure that it goes troublefree. If you have modified any of the core desktop modules or any other DNN core files, yes you will overwrite them and need to take precautions to be able to restore your changes. Third party COMMERICAL modules will just remain as is because 99.9% of them will not have messed with the core DNN files. Also, you want to heed the advice in the documentation about upgrading in the Installation PDF. Specifically the parts pertaining to correctly setting up the web.config during an upgrade. Not doing so would be very costly to you.

Again, the best scenario would be to copy the DNN directory to another location, set up a virtual directory on you IIS to this directory, copy the database to a new replica database, change the copied web.config to point to this new replica db, change the URLs listed in the portalalias table in the replica db to the new virtual directory and test the migration.