The concept behind knights is abstracted considerably - in essence, knights were non-hereditary landowners, in direct service to the geographical liege, be it a baron serving a higher lord, or the higher lord himself.
Remember that, when you grant a barony to a noble, you're granting more than just the castle. There are going to be tens or even hundreds of villages that go with the fief, and the Baron doesn't have time to travel around each and every one of them. This is where the concept of knights comes from, really - they were non-hereditary, minor lords.
The military knights you get from your levy is a way to get around this abstraction, in my opinion, as the wealth of the region would directly dictate how many minor lords could be granted lands, with the expectation of military service in return.
Remember too that your levy doesn't really live at the castle - they're troops trained and provided for by the minor lords within your fief - i.e. the knights.
As for the lowborn issue - I think that the thing about being new men is how I'd most likely look at it. They're not from some old noble family, but men (and women) brought to the attention of the ruling classes by merit. In many cases in the real world, these 'new men' ended up passing significant wealth and land to their children, and so on and so forth, such that within a few generations they were considered true nobility. This doesn't appear to be handled in CK2, nor does the concept of cadet branches seem properly fleshed out, but as you'll never be in charge of a dynasty that was originally lowborn, it has limited impact on the gameplay.
What is worth saying is that knights *can* be lowborn - a knight's requirement was that he was, well, knighted. There are many instances throughout history recording lowborn men being knighted, while very few instances of them being elevated to hereditary nobility (the peerage). Doesn't mean it didn't happen though - you might grant a lowborn a barony in CK2, but the majority of the time (I find) you end up giving it to actual nobles.