I haven’t had the chance to visit Baños yet, but two of my friends both say La Floresta was a great place to stay. And of course you can always look at TripAdvisor to see which hotels get good recommendations there.
That area is next on our list of places to visit in Ecuador, so I have no specific recommendation either. We have had good luck using booking.com in our road trips around the country, even in smaller towns like Piñas or Puerto Cayo. One word of advice – even when you book online and they ask for a credit card to reserve, don’t assume that the hotel will accept plastic. We have found that many of the smaller hotels are only setup to take cash.