Water in cylinder

I think you have a blown engine cylinder head gasket, your choice on the decision to fix it or not.

If the low coolant from the water pump leaking has caused the engine to overheat, then the cylinder head(s) can warp and the head gasket(s) will leak also.

Possibly blew a head gasket allowing combustion gases to enter the cooling system and force coolant out of the overflow tank. This can be verified by doing a compression check on each cylinder.

There is always a better alternative than the dealership as far as costs. They want to put a new motor in a 2003 model? That is ridiculous to me- cost-prohibitive. Find a reputable independent shop. Look for references and customer satisfaction. A used, low mileage replacement engine is a better alternative, probably less than half the cost of a new engine.
There may be an even better alternative, where you refurbish the top end of the engine-the cylinder head and valve train. This is dependent on that a wet-dry compression test supports rebuilding the top end. What I mean by this is a compression test of the cylinders reveals low compression in one or more cylinders, okay. Next, they would squirt some oil (about a tablespoon) in the low cylinders and check compression again. If compression doesn't change, it points to the valves and valve train (the valve guides which wear and could let oil into the cylinder). But if compression is higher in the wet test, then the piston rings are worn and losing compression, and oil gets past them-this would indicate the engine needs a complete rebuild or a replacement is called for. The reason for the wet test is that the oil will temporarily seal around the piston rings and improve compression if the rings are the problem.
If the test shows the valves are the problem (and it is very possible on an engine with only 120K-your bottom end could be fine), then a top end rebuild of the engine is a much cheaper route than any other choices. You may not know this, but often a little oil burning in the cylinders at start-up is nothing more than the valve stem rubber seals are deteriorated-a real cheap fix. The dealership probably won't tell you this. However, with the loss of power, well, that points to something more severe than valve stem seals. So I would recommend the wet compression test, just to check if it is the top end or the bottom end. If it's the top end, you could have the cylinder head reconditioned and motor along for a few more years, trouble free.
Similar to a compression test, a "leak down" test of the cylinders is actually a more accurate method of finding where compression is lost, and it's only a one step test. They hold compressed air in the cylinder and analyze where it escapes to pinpoint compression loss. Loss of compression translates into loss of power. Have either test done before you decide. Find a good mechanic and trust his advice. (Stay far away from dealers. Greed is their motivating factor.)

if the cylinder head is the problem just replace it, but the leaking could just be from faulty head gasket you dont need it overhauled, all it needs to be done is take the cylinder head out put new head gasket

Could be hydraulic lifter is holding valve open. Bring no 1 cylinder to TDC firing Lock engine from turning and with adaptor inject air to cylinder. If air comes out intake manifold then intake valve leaking. If comes out exhaust, you guessed it exhaust valve not closing. If comes out sump then bypassing rings. If comes out of radiator , head gasket leak into cooling system

you may only need a valve. What is pressure in other cylinders? If OK, take head off before making your decision. Unless whole engine needs work, it is much cheaper to fix the head. If you need instructions, please let us know.

If you have coolant mixed in you oil you have blown a head gasket at the very least. You will have to pull the heads and replace the gasket.

Need to know engine size. If it is a 2.2 or 2.5 you should not have any trouble finding good used parts if needed. You may find a complete engine in good condition for 2-3 hundred. Call your local wrecker and see what may be available. It might surprise you. Good luck.Moe

If your going to do the work yourself, its not an expensive fix, little time consuming but it you pay attention to the parts when you take them off its not that bad, all in all, should be able to do it for less than a hundred bucks. Gaskets and fluids are all you need.