engine needs replacement

I am unsure of what I am doing here and need help. According to both a Toyota dealer shop here in Chicago and an independent mechanic, the engine on my 1992 Tercel is dying and is about to throw a rod. This means either buy a new car, get a new (i.e., used) engine, or have this engine rebuilt.

The mechanic first said that he might be able to order a used engine < 60K miles for about $600 and do the entire job for $1200. The next day, I called and he said that these 3EE engines are very popular. In his view, they wanted too much, around $900, which would bring the total cost to $1500. I told him I would think about it. I poked around the web, and the $900 figure does indeed seem to be the average.

After a couple of days, it seemed worth it, so I brought the car in for a full inspection. I said that if the car had nothing else wrong with it, then I might do it. He inspected it and said that the car is in good mechanical condition. Apart from the engine, it needs new brake pads (which I knew about beforehand) and has a broken axle. He did not charge for the inspection, which is a $70 job.

He then suggested that instead of ordering an engine, he could rebuild this engine for only $200 more. In his view, a rebuilt engine is more reliable and the car could run another 4-5 years. (It has 114K miles on it.) The job would include a new timing belt. His written estimate for the engine overhaul, brake pads, and new axle was $2150, most of which is labor.

It seems worth it to me. I am a student, and it is way cheaper than buying a certified pre-owned vehicle from a dealer and being stuck with payments. Also, this mechanic's customer reviews at the cartalk.com machan-x-files section are stellar (which is why I went there). He does appear to be knowledgeable, and explained to me what is involved with the rebuild as much as a layman could understand. But I want some opinions first before I make the investment.