I'll just go for number 2.

Start with what was there first and then build around it. How did the town start? Did some pioneer farmers in the late stone age come to a river fork and build a few huts first, and the thing grew from there? Was it built around a mine? Was it a defendable area? What was the landscape like? Usually, in times of peace, people will settle where they can get two basic things right off the bat: water and food. If you have hazards, like bandits or raiders, you need to add defenses to your thinking - maybe in a river bend with difficult access, so there's only a narrow area to defend, or on a hill-top (like a hill-fort). The town could alternatively grow up around a monastery, a sacred place or temple, a castle, a strategic trading area (i.e. a crossroads, or below an important mountain pass), etc. etc.

Then, once you have the basics - why did settlement start where it did - you grow it from there. In a peaceful area it would have spread in areas where it didn't disrupt agriculture - so, usually, hillsides or less fertile areas, to leave enough ground for producing food - a big limitation in an period of relatively poor transport of bulk goods.