Sometimes it's hard to see the coolant level on older reservoir tanks that are darkened with a coating of "crud".
That erratic temperature gauge reading, coupled with insufficient heat, may just mean that you're low on coolant -- the thermostat opens and closes, letting steam escape, varying the sensor's reading of the temperature, but the low level is insufficient to deliver enough hot coolant to the heater core.
But in any case, also change the thermostat -- it's something good to do every couple of years, and you may find that it's really badly corroded anyway, especially if the coolant has been low for a while and therefore isn't immersed all the time. A full cooling system inhibits corrosion by displacing air (which has oxygen), whereas a partly full cooling system allows entry of air (oxygen), hastening corrosion.