Well, I found the culprit, I took the front drive shaft out (1” modded splines were installed by PO) the drive shaft was not the issue.

I wiggled the input flange on the front diff and it has about 1cm of movement up/down/left/right and about 5mm of play front to back. So the bearing there is shot, the grinding sound is probably the balls from the bearing tearing the innards of the diff to shreds.

I was thinking of getting just a new bearing but I doubt the inside gears are any good. So a replacement diff is needed.

Im going to be checking junkyards and partouts in the area for a replacement diff. Drive shaft is out and the diff is still making the grinding sound, so driving the car is off the table, since all the fluid leaked out there’s a risk that the other bearings seize.

I will be updating the thread as I go, I’m definitely interested in what the inside of the diff looks like.

Thanks all for the tips and strategies!

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Current Garage:
BMW 2001 325i 5spd manual
BMW 2006 X5 4.4l N62