Is there a way to tell where you are on a terrain? Say for instance you have a castle placed on a terrain. Then you would like to go into the terrain editor and dig a stream and a pond in front of the castle. How do you know where to dig? You can’t see where the castle is in the terrain editor.
Thank you. I hope I am clear enough.

I know what you're saying... i've come across the same issue myself.  the problem is, as far as i know - there is no way to determine where objects are placed when in the terrain editor.

my workaround is to duplicate first terrain, raise it up some, flatten it mostly.  now, go to the editor for the new one and reset everything, then draw a grid or use a grid image to make one.  this will show you in the main window approximately where on the grid your object is and how the terrain lays in the editor compared to the actual scene.

dig on the GRID terrain first.  this helps cus you can then easily see if you've messed up and dug in the wrong quadrant --- without messing up your original terrain with a buncha digging tests.

then, when you know about where you should dig, switch terrains and go to the editor and eyeball where that spot is.... dig, and cross fingers when you check =D

its nowhere near precise, but is the best thing i've come up with so far =/

Is it possible to do this: render a top view of the terrain with object on it and merge that in the terrain editor with the terrain your editing. Then unmerge it so you have only the terrain without the picture merge.
I haven't tried it yet I just thought of it after reading this.

now thats an interesting idea.... at first my mind went "no, that wont work" - but you're right - a quick peek like that shouldnt hurt, as its undoable, and will show you just where the objects are... hmmm....

I normally do a boolean subtraction. That is very precise because you can put the cutting element exactly where you want it, using the orthogonal and camera views. After you cut, you can still adjust the relative position of the elements for an even more precise cut.