Do assets have to be below public_html to access them in redactor? I love that Redactor lets you choose existing entries, categories, and assets!

I am trying to set up a 'Files' source whose File System Path would be something like 

/home/hostingaccount/craft/files


where index.php is at 

/home/hostingaccount/public_html/index.php


But what source URL can point to that file location? It doesn't like http://mydomain.com/files. Or am I all wrong, and the assets have to be in something like this:

/home/hostingaccount/public_html/files
Your Asset source file system path needs to be under your public_html folder, so your 2nd example is correct: /home/hostingaccount/public_html/files.

Then your corresponding Asset source URL would be http://mydomain.com/files.

Correct that, then Asset related functionality (including Redactor's) should start working.