I want to create a ripple effect. I have an existing smart object with a black/transparent "ripple" effect. I want to turn this into a refraction effect so that you don't see the black/transparent effect, but you instead see the image below it refracted and bulging, like you would see in a water ripple.
Sounds like you want a displacement map.
Save the displacement map as a separate .psd file
In a new document, set the source image as a Smart Object so that the displace will be applied as a Smart Filter.
Filter → Distort → Displace..., use the settings below, and click OK
In the file selection window that pops up, choose the displacement map .psd file that we saved in step 1
Photo credit: mkozemchak