I have a 2001 Volvo AWD with 160,000 miles. A couple weeks ago we noticed a funny "bearing noise" while travelling, mechanic checked it out, thought a front axle bearing.

Now, my son was driving car and it sounds like you are dragging an iron girder under the car. Had it towed to mechanic, looks like the rear output shaft bearing started to fail, the vibrations ground up the internal gears and it actually banged a big hole thru the casing.

Is this normal wear and tear?? Mechanic wants to replace the whole transfer case for 2,000 (mechanic is a highly trusted person) just looking for options, and thoughts on this being normal wear and tear or what.

Would appreciate any posts. thanks.

"Normal"? No, but quite possible. Very few owners change the transfer case oil which does degrade and should be done at 50K mile intervals. When the oil gets super hot, and it does get very hot, the seals and gears will start to go bad. This happens a lot when the car is driven hard in slippery conditions. A hole in the transfer case? Wow! Initially, my thought was to remove the rear drive axle from transfer case to rear diff. But in your case, either find a used transfer case and do the labor yourself or send the car to a recycler. If you get a new transfer case, leave the prop shaft in the garage and go with FWD.

Many 2001 AWDs are real cheap because of the tranny problems, like $1,500 or less, even in 'good' condition. I suggest finding a replacement car.
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Keeping it running is better than buying new

GM,
I recently had to put down my 2001 XC70 at 225K miles. I had the Beast for 12 years and recent years, she was in the shop almost as much as she was on the road. I have a lot of questions for you. Did you recently change tires?? If you did I hope you changed all 4, because if you changed 1 or 2, you accidently killed your transfer case!! Do you experience bad shifting going from second to third (mine was an automatic and yes it shifted awfully, it almost felt like someone punched me in the back!!) The Volvos of the early 2000's are notorious for tranny issues. Is your car using lots of oil?? When did you last change the timing belt?? If you have 160K, it will be coming up in about 2 years, that's about another $1K. How are your shocks and struts??

All of the above work I had to perform in the last 3/4 years on my car and none of this work was cheap. I loved the car, but it was time to let her go....

$2K is fair for the transfer case work and get a guarantee on the case and labor. You really don't want to revisit the shop if the case fails.

Looking back, I think I should have cut my loses earlier....

I hope this helps.