Actually not a hostel, but a hotel, the oldest hotel in Baguio, in fact. Casa Vallejo would be the perfect waypoint on your way to or from Sagada. Located at the top of Baguio’s Session Road area, Casa Vallejo is central to almost everything with many key commercial areas within walking distance yet at the same time it still feels secluded.
And to make it even better, inside the building is located also the fabulous Hill Station restaurant and awesome Mt. Cloud Bookstore.
And the prices aren’t too bad, too. They average around 2000 pesos a night for two. And even as low as 1500 pesos a night during the low season.
Update: As if Casa Vallejo wasn’t awesome enough, they just added the first Cinematheque in the Philippines. They screen Filipino (and hopefully foreign films) for free.