Freelance Pay

I have heard of it both ways. Part of it is simply negotiating with the client before beginning the work. Also, the more you do it the more you get a feel for how long it takes you to complete certain tasks. Using a timetracker piece of softwar can help with this (especially one that has built-in invoicing capabilities like NCH's Hourglass, which I personally use). Other things to consider are doing pro-bono work for a potential repeat customer on something small so that you can charge them on the larger item.

I don't know for level design, but as a graphics designer I've done both hourly rates and flat fees. It usually depends on the client and what kind of product they are looking for. I would definitely go for the flat fee to begin with if you're just starting out though, since you might not have a good grasp of how long something will take you and thereby you won't really know how much they client has to pay you, and that's seems sort of unprofessional and sloppy.

Not to mention if you working on a hourly rate, sometimes you feel pressured by that and sometimes that might lead to a worse end result which bad both for you and your client.

Note though that this is just experience as a freelance graphics designer, but I would imagine it's pretty much the same as a 3d level designer.