Hi BigKriss.
Nothing wrong with a very small hole in the themostat, but 3.5 is way too big.
Less than a 1mm used to be standard in most off the shelf thermostats.
Its for a bleed and also to allow just a small amount of water circulation so that water was moving around the engine and radiator and past the coolant sender.
At the very small size it made no difference to warm-up time or hot running. 3.5mm will certainly slow the warm-up time from a cold engine.
I'm not sure that it should have made a huge difference to the running temperature but obviously it has. Must be a very well sized radiator and cooling volume to find a 3.5mm passage over-riding the thermostats opening.
But as already stated, running too cool is detrimental as is running too hot. If the clearances haven't been taken up by expanding metals, you can burn more oil, have less performance, and the ECU may keep the mixture a bit richer than it should be as well (ie: increased fuel consumption). Engine wear will increase as some clearances meant to open won't, and the oil will be thicker and a bit more sluggish to pump around.
ie: Don't pull any 6 grand acceleration runs in this condition.
ss2115.
BMW 525i Touring - 1993 (current drive car).
DS23 Citroen Safari - 1974 (restoration and modifications).
Golf MkIII - 1997 (fun car and daughters learn-to-drive car)