I'll try to tackle your questions, but some parts of your posting are unclear.
Your parents actually had a contract for deed, not a mortgage? If so, that's what they negotiated with the seller. You don't say what the "stupid interest rate" is. However, it's not unusual in a contract for deed situation for the interest rate to be somewhat higher than the going conventional rate.
But whatever they're paying (or, whatever you're paying on their behalf) is what they agreed to. You can get out of that arrangement by fulfilling whatever the terms are for the contract for deed--for example, by refinancing. Otherwise, the agreement stands.
You say that, since paying $2,100 in house payments since January, only $174 was applied to principle. You ask: "Is this legal?" Yes. That's how loan amortization works. Although the payment is flat, virtually everything you pay in the first few years is interest. Gradually, that shifts, so eventually you're paying more in principle than in interest.
You don't provide information on the mortgage amount (or the interest rate), but if the mortgage amount were $117,000 at 6%, 30 years, the principle and interest payments would be just about $700 a month. If you've paid 3 months of payments ($2,100), that'd be $700 a month. With those figures, you'd be paying about $117 a month toward principle. Since you're accumulating less, I'd guess the interest rate is higher.
With a mortgage of $87,000, at 9%, 30 years, your parents would owe about $700 a month. And the amortization on that works out to about $48 a month going to principle in the first few months of the loan. Is that about what the arrangement is? As I say, that's perfectly legal.
You ask: "Is it better to let this family home and 5 acres get taken away or buy another home?" That depends on a lot of factors. How much is the property worth, versus how much do your parents owe. If it's worth $150,000 and they owe $87,000, then it definitely keep it. Even if it's worth less than you or your parents owe, be careful before giving it up. Even with a contract for deed, there could be credit implications. Beyond that, your parents (or you) need to live somewhere.
You need to sit down with someone--a financial advisor, an accountant--and go over all those numbers and see what will work best for you and your parents. It's also possible that you'd be able to renegotiate the terms of the contract for deed with the seller--maybe bring down the interest rate a bit. That'd lower your payments and put more money every month toward principle.
Hope that helps.