Yep, in the back of the head where the water is just entering the head to cool it. All the 250's are taking temp readings from that point. You should be getting a normal temp reading. Try blocking the outside edge (about 6 inches) of your radiator. See if the temps come up. That isn't the solution but it might get the engine warm enough to make the heater work. The by-pass hose circulates water past the thermostat to keep the engine from boiling before it can react. The heater by-passes the thermostat too so both of those shouldn't have an effect but they might be contributing factors. What temp thermostat are you using?
How cold is the ambient air temp where you are??? Have you installed a larger radiator??Are you shure there is no air in the system???An air pocket would have the opposite effect(gets hot fast)Pinch the top hose with the engine running and the cap off.Hold for about 20 seconds and let it open back up,watch the coolant flow in the radiator you should get a rush of coolant flow,if not the pump is not pushing enough coolant and is bad(rotted off impeller blades)If you can drive the car,do you get better heat while in motion?? if so pump is bad.If its better heat standing still,T-stat is stuck open for some reason or you have blockage in the cooling system.Good luck.
The T-stat housing might be bad and it's not allowing the t-stat to seal properly. Since you're getting heat, I wouldn't worry about it too much unless you're afraid you might freeze to death in the car. This is one of those things where you could spends hundreds of dollars fixing a 50 cent problem. The system is working well enough. Blocking the air flow across the radiator or even putting in an electric fan are both excellent band aids.
Just one small question, I thought it was not possible to get a accurate reading from that "hole", that it was just for the red temp light, probably just me being way off...