As above, you don't need a 'freewheel' - you need the ratchet mechanism that is part of the hub, called the 'freehub body' - this is what is making the grinding noise. Shimano 7 speed freehub bodies are still available, I think. If not, you can probably find a similar hub to use as a parts donor.
The 12-28 cassette is a separate part from the freehub body, and may or may not need to be replaced. Even if it is very worn, as long as the chain still meshes with the teeth then you can keep riding. But since the bike is quite old I would expect the cassette (gear cluster), chain, and chainrings (gears on the crank) should be changed at the same time.