Well, I took it to the dealer today to get the bad news. Something has happened to the front axle on my 325xi. I was starting to suspect the axle, based on when I could hear the noise, but I didn't believe that it could happen since I wasn't in any accidents. It turns out that something melted, possibly from the heat this past summer and me driving it a lot (I put almost 98k miles in less than 3 years). In addition, whatever melted leaked on the front brakes so they need to be replaced too. I also remember that them saying that the problem is more common in AWD.
I don't remember the exact details of the problem. If someone is interested, I can post once it is fixed. Unfortunately, it's going to cost like $1,300 to fix everything including the brakes.
In the meantime, I got a new 325i as a loaner. I get to test drive the new 3 for a couple of days so at least I got something good out of it.
And regarding the comment on dealers not wanting to fix noise issues: Obviously, this was not just a noise issue, but I'm curious to know why they would not want to take your money to fix something? I suppose if the car is still under warranty, then they may try to convince you that nothing is wrong but I don't believe all dealers are dishonest like that.
Maaz