Usually you stitch the first colour on stabiliser only. Then you place your towel against this line and sew more colours. You should get a placement line for the hole as well. After that you cut away the fabric not the stabiliser. It depends a bit on the design you're using when the stitches for the hole are place. There are nice tutorials on Adorable Applique that explain everything with pictures.
Hi this is a great question & I am pretty sure that if you go to adorable applique they have a picture tutorial that I found very helpful & maybe you will too! Good luck. Loralye