Was about to do an oil change and checked my air filter and half of it was cover with a build up of water/oil gunk. My dad and I then checked the oil in the engine and it has water in it. The exhaust is blowing white smoke and soaks up a paper towel with water very fast vs my other jeep (97 XJ). The engine runs fine and there are no strange noises. The coolant is almost empty and needs to be frequently refilled. Any thoughts on what to look for to fix the problem.

 

Sorry to say, but it sounds like you have a blown headgasket. It's expensive to have a mechanic fix it and if you do it yourself you can learn a lot about how your engine works. You'll need to remove the cylinder head to get to the gasket, and in the process you can clean or replace your lifters and valves to improve performance. Now, if you blew the headgasket your engine at one point or another may have gotten very hot and warped the cylinder head. You may want to have the head machined, which will bring it back to a flat surface, and as a bonus you'll have slightly higher compression. So, if you have the dough, cough it up to the mech. But if you have a weekend with some ambition you can DIY with the potential for better results.
The coolant that you're missing is being pushed into the cylinders between the cylinder head and engine block. You're getting enough fuel and air so you're still getting combustion, but the white smoke you see is gasses from the coolant after burn(exhaust probably smells kinda sweet too). The oil in your air filter is a common issue with stock airboxes and is a result of blow-by. Coolant entering your cylinders may have deteriorated your piston rings, and at that point you're looking at a complete rebuild. A more common fix is to clean or repair the crankcase ventilation system (the tubes running from the front & back of your valve cover).

 

Thanks thats what we figured. Yeah we will be doing the work ourselves. Today is clean the garage to make room and tomorrow is repair day.

 

Thats sucks! I blew a head gasket years ago in an old toyota. Good luck! Hey, take photos of the break down if you have time, I would love to see the work!

 

Unfortunately 2xs.

 

Also check the bearings (rod,main) they do not like antifreeze. Might be a sign to stroke it . Just a thought. if you pull the head yourself and pull the lifters and reuse them they MUST go back to the lobe they came from. also you will see which cylinder(s) the coolant was leaking into the piston(s) will cleaner than the others