I don't think it would be heater core if the heat is turned down or off but you are prolly in the correct area. There is a heater hose that I have replaced in the past that is known problem on the E39 540 to develope a pin hole leak at one of the bends, it is located at the back of the engine/passenger side. If I recall correctly it connects to the right side coolant manifold at the rear of the engine and runs around and down to the heater auxilary pump on the left shock tower.
Get the car hot then open the hood and check the rear heater hoses for dampness, the pin hole maybe just starting and will spray a fine mist that is barely noticible. It is normally at the top bend in the hose that this pin hole occurs.
'99 E39 540iT