I just completed the same job at my son's house. Don't go to the trouble of grinding out the mortar around the window frame. My guess is that it will chip away from the block quite easily once the window and jambs are removed. Chip away all of the old mortar surrounding the old windows and start fresh. Install your new windows level and plumb, then spray foam around them. Once the foam has set, repoint the space around the new windows with mortar, if you wish. I only did the outside, making sure to slope the mortar away for good water runoff.