We stayed at the Hostal Costa Azul over 5 nights in mid-October, 2010. Actually, we weren't put up in the actual Hostal, but in another building about a block and a half away, the Arte Vida Suites. These are rental apartments, and we were put in the "El Amante", on the top floor, as I recall. It was perfectly fine, if perhaps needing a bit of updating.
The only criticism I have is that, perhaps over time, dinnerware must get broken or missing, and they don't seem to be replaced. For example, there was only one cereal bowl--actually only one bowl of any kind! Our coffee pot was missing a lid, with the result that we had to physically hold a spoon on the top of the pot for it to work properly.
Other than that, the staff at the hotel were welcoming--but they are very relieved if you try to speak Spanish with them. The Suites are on a very quiet street, and one night were were serenaded by a violinist practising in one of the dwellings nearby. Quite lovely.
I would definitely recommend this place if you plan to be in Granada for more than a night or two. It's great to enjoy an occasional home-cooked dinner in your place. I also agree with other reviewers that you should just forget about a car in Granada. I don't know where you would ever park it.