When you install a Linux. It has a boot loader of either Grub1, Grub2 or Lilo. The Linux boot loader always resides inside the /boot directory of the Linux partition but may or may not take control of the partition's boot sector. If you put Linux boot loader inside its root partition (this got nothing to do with Win7 partition which also has a \boot directory) then that Linux can be booted by another operating system. Therefore you can configure Win7's bootmgr.exe to boot Linux. If you elect to put the boot loader in the MBR the boot sector of the Linux partition will be empty.
If you choose Linux's boot loader into the MBR all the damage it will do to Win7 is to overwrite the MBR, which is the first 512 bytes of the hard disk, thereby Linux can it to fire up itself.
It is an "obligation" for every Linux installer to check every partition's boot sector for a boot loader and include it as a booting choice if one is found. MS Windows always put a booting code in the boot sector so that is why every Linux installer will dual boot MS Windows on completion of an installation.
Win7's booting code in the boot sector can also be generated by its installation DVD by the command
Thus you are pretty safe as every part of Win7 boot loader can be restored with just its installation DVD.
Basically after a Linux has been installed and you elect putting Grub in the MBR the sequence is exactly like you have predicted but I expand it further.
The Bios loads the MBR and so fire up Grub. Grub always has two parts Stage1 is exactly 512 bytes long. Stage2 is inside /boot/grub directory and linked to stage1 by its hard disk address.
If you select Win7 to be booted in the Grub menu then Grub will load the boot sector code of the Win7 partition. That boot sector code will search Win7 partition and load only the bootmgr.exe. It is the bootmgr.exe that displays the Win7 booting choices (also called BCD). From then on you go back to what you were before the Linux installation with whatever booting choices available in Win7.
Linux installation never touch anything inside the Win7 partition. The MBR is not even a part of Win7 partition either. It is a stand alone entity of the hard disk.