A mid sized colonial city with lots of great architecture. They use horse drawn carriages for tourism, but also for day to day tasks. Granada borders Lago Nicaragua and is home to many Spanish schools, a large market, great parks, several cigar factories, and tons of beautiful old churches. You can catch a ferry to Isla Ometepe from here, but look forward to four hours of really choppy riding. We recommend taking a bus to Rivas and catching a ferry at San George instead- that one only takes an hour and costs about a buck (it can vary).
We stayed at Hostal Hamacas (http://hostalhamacasgranada.com/), primarily because it was one of the only budget hostels with a private room available when we were in town over New Years. It’s about three blocks (away from the lake) from the central park. It was nothing fancy, but had everything we needed and was pretty quiet and safe. If you don’t stumble across it, get directions towards the large market for fresh food and a super cheap lunch cooked over wood fires. Granada can be pretty expensive, I recommend passing on the expensive tourist restaurants on the strip and seeking out some good comida tipica. The locals are very friendly and would love to point you in the right direction. We also recommend taking Spanish classes while you are here! There are Spanish classes for five dollars at One on One Tutoring, located right downtown (http://www.spanish1on1.net/).