I recently bought an'87 300tdt with a blown engine and face the same questions as you do. I found an engine in a local yard with a 90 day warranty for $1600.00, which is considerably less than either a rebuilt engine or a dealer
supplied replacement. If your car is really clean and you want to keep it for a long time as a reliable driver, you might consider a factory rebuilt engine. Fletcher-Jones
in California seems to be pretty good about its pricing.
Luckily, my car runs great with the cheapo approach, but when day 91 comes, I'll be sweating it out!