The 'identity' factor is the key element here. A few people have brought it up but it keeps getting glossed over.
Some people seem to be under the impression that in the middle ages a gay man would be analogous to a gay man in modern times; however, the modern gay rights movement literally began with a call for homosexual people to recognize their innate sexuality and form an identity around that, to 'live as a gay man/woman.' The whole notion of living in the closet was, at one time, a very real and normal thing. It wasn't about gay men secretly pretending to be straight, it was about people with sexual preferences that were trying to live normal lives while confused by, or uncomfortable with their urges. They didn't identify as gay men or women, they identified as the father of their children, the husband of their wife, a family man. Their identity didn't include being gay. The idea of having a gay identity is a relatively recent phenomenon. Yes there have always been people who completely embraced their sexuality, but until recently the number of these people has been very low. If we assume that in the middle ages the percentage of the population that is gay is similar to what it is today - and we have no reason to think that it wasn't - then you could estimate that around 2-8% of the population had homosexual leanings.
How does that sort of thing manifest in the kind of society that views marriage and relationships and obligatory breeding in the way that society did in those days? For the vast majority of gay men it would likely manifest as a general disinterest in mating with females - not an inability to, or even a distaste - and feelings about men that they block because they know that it is inappropriate in their society. I would suspect very few would graduate to having any kind of sexual relationship with other men, and may desire to remain appropriate and faithful to the church more than they desired what many of them must have felt were deviant and sinful thoughts. Even today we have homosexual people who identify as the father of their children, the husband of their wife, as a family man. It seems unlikely that you wouldn't see the same thing happening in the middle ages - and even more unlikely that it wouldn't happen more often.
So maybe Paradox did handle it in a fairly good way; homosexuality results in less interest in sex with their wives, and not necessarily a proclivity for homosexual intimacy. Still, it would be nice if an event sometimes triggered that gave you the option of pursuing an affair with a gay courtier, or choosing the pious route and avoiding it. That would be quite interesting and still give people with, er, less tolerant views, an out.