A little different explanation is what makes more sense to me regarding how water ballast works. You get a righting moment from moving a weight horizontally (because gravity acts horizontally) at the end of a lever arm. When you fill the water tank the boat does sink a little but it its simply a hull that has a fairly low center of gravity (CG).
The boats center of buoyancy (CB) is initially in line with the boats CG so there is no righting moment. However, as the boat starts to heel, the CB quickly moves to the outside of the boat and begins to create a moment arm that lifts the boats CG. How fast the CB moves out depends on hull shape and this is also why the boat is initially tender. Once the CB has moved out from the center and creates a moment arm that begins to lift the CG, the boat stiffens up. Its not the ballast going above the water line that creates the righting moment, its the center of buoyancy moving to the outside so that the center of gravity starts to get lifted - against the force of gravity.
At low heel angles, the water ballast boat CG is actually well placed to give a high righting moment per weight since at low heel angles, the raising of the CG is mostly in line with gravity. One more reason to sail a water ballast boat flat.
At high heel angles, the water ballast CG movement starts to have less of a vertical component and more of a horizontal component so it doesnt produce anywhere as much righting moment as a deep keel boat does. But at low heel angles, water ballast works well and if you want them to sail well (by maximizing the righting moment per ballast weight), you need to also keep them at fairly low heel angles.
