Is it possible to parse a file line by line, and edit a line in-place while going through the lines?
No. You cannot safely write to a file you are also reading, as any changes you make to the file could overwrite content you have not read yet. To do it safely you'd have to read the file into a buffer, updating any lines as required, and then re-write the file.
If you're replacing byte-for-byte the content in the file (i.e. if the text you are replacing is the same length as the new string you are replacing it with), then you can get away with it, but it's a hornets nest, so I'd save yourself the hassle and just read the full file, replace content in memory (or via a temporary file), and write it out again.