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https://ck3.paradoxwikis.com/Barony#Terrain_buildings
Cities give you a little more money thanks to their Holding buildings, and this money can be used to maintain more MaA regiments, which is generally considered a better deal than the extra levies provided by Castle Holding buildings. However, Castles are naturally defensible, deal attrition damage to enemy armies, and make it take a lot longer for the enemy AI to siege down your home territory.
Personally, I'd take a cue from history and build castles on hills and mountains and other crappy terrain - the reason being, if an army is besieging a castle, and you send a relief army to help your castle, the battle will be fought AS IF your attacking army is the Defender. Thus, if you put a castle in a mountain province, you'll get the opportunity for a mountain defense battle, which is good (unless you're spamming cavalry, in which case plains and farmlands might be better).
But, when in doubt, build cities. If you need more castles, you'll probably know.
Well, for me, at least.
mountains, hills and such should be used for military buildings.
Mountains also for money because you can build mines/quarries
Forest for archer man at arms, you can build many buildings with archer bonus
Hills and plains for horses, the terrain with most horse buildings.
the rest doesn't matter do what men at arms you are using.
That's pretty much what i do.