This is an interesting piece on the use of the terms fag and faggot and their use as primarily derogative terms towards gay men. These terms were mainly used in North America and have now become commonly used in many English-speaking countries.
But if you look at the words and their history you will see that their use was very different. Fag in UK English was used as a slang term for a cigarette, and although to a lesser extent, it is still used in that context by many today in the UK. It also can refer to underclassmen in public schools who are used to perform menial duties for upperclassmen. Those duties may include cleaning, running errands etc. This leads to the term fagging, a word used to broadly describe the duties the fag performs. Faggot is a bunch of sticks used to help light a fire, you could use a full or half faggot to achieve this. Faggot is also a popular food item made from pork and various organs from a pig, they are usually served in an onion gravy and are quite tasty but may be considered an acquired taste due to their ingredients.
The American usage and meaning appear to have taken over from the original usage of the words. Many authors tend to shy away from their usage for this reason. I think that its usage in stories should be considered in context to the story, its setting in time and location have a great bearing on this. When writing any story it should be told as authentically as possible and any words or phrasing should be used as accurately as possible and used in context. As an author from the UK if I use the phrase 'smoking a fag' I'm probably not referring to killing a gay man, in the UK it would mean smoking a cigarette.
Used in their correct way the words fag, faggot, and fagging have different meanings and should be used to provide authenticity to a story regardless of the context or meaning. The authenticity of a story and how well it is written will attract the readers, not its use or lack of profanity.