I have a library with a large number of custom document templates which I would like to organize based on type of document. As of now, users choose the document from the drop down under new document, but I am wondering if there is a way to organize this list with folders? Any help with this would be great!
I don't think you can easily achieve exactly that, but you can assign different content type orders to different folders so that inside each folder the menu is by far less cluttered and appropriate documents go to appropriate folders.
Use "content type order" in the context menus that pop up on folders.