I should also have noted the instance in the Eyrbyggja saga, which describes a conflict between the land dead and the sea dead. This appears to be an early expression of Migratory Legend 4065 "The Dead from the Sea and those from the Land" (based on the system of classification devised by the Norwegian folklorist Reidar Christiansen). In this story - as gathered in the nineteenth and twentieth centuries - someone has somehow offended the dead lost at sea, and these creatures chase the protagonist who, reaching a churchyard, calls on the Christian dead to rise up and defend him. The next day, people find debris from the fight including broken ores, nets, and seaweed as well as broken bits of coffins. The idea, here is that those lost at sea are inherently antagonistic against those who received Christian burials on land.

The evidence from the 13th/14th-century Eyrbyggja saga suggests that this is an old motif. But in the saga, the churchyard is not part of the mix. Instead, the two groups of the dead seem, simply, not to get along. This provides evidence that the legend may have pre-conversion roots. It also gives us evidence that Medieval Scandinavians believed the ocean to be populated by the dead, those lost at sea, who could rise up in very real, corporeal forms in ways that were antagonistic to the living.

/u/EyeStache has an excellent answer here. Based on ethnographic work with pre-industrial people of Northern Europe, we would not expect medieval Scandinavians to believe that they would actually encounter the world serpent or any of the gods believed to dwell in the sea. People's experiences are more immediate and are more likely to deal with supernatural beings of less consequence and more accessibility.

Connecting the dots - again using ethnographic work from the nineteenth and early twentieth centuries - it is possible to project back to a certain degree. Widespread Northern European belief in seafolk societies suggest that belief in these underwater entities may have part of medieval Scandinavian oral tradition. That said, we must rely on conjecture rather than solid evidence.

The following is a paragraph from an article I just submitted for publication dealing with Cornish mermaids. Perhaps it might help:

The late Bo Almqvist discusses the work of Helge Holmström and his 1919 thesis on the Swan Maiden Motif: “the Swan Maiden Legend is but one of a whole complex of migratory legends relating to marriages to supernatural or supernaturally transformed female beings. Thus [Holmström] distinguishes groups dealing with marriages to fairy women (feäktenskaptyperna), another group about personified nightmares (maräktenskapstypen) and a third one about aquatic beings, mermaids or seal maidens (säläktenskapstypen).” There are ubiquitous Northern European stories about marriages between oceanic supernatural beings and men, but this motif occurs in only a limited way in Cornwall. Indeed, Almqvist suggests that one of the more widespread legends of a mermaid entrapped by a man, with whom she is forced to live for several years, is found in Gaelic-speaking areas and in Scandinavia, but that it is not found in Wales or Brittany; by implication, one would not expect to find that specific story in Cornwall. The supernatural being and its relationship with men was, nevertheless, an important part of Cornish folklore. Source: Bo Almqvist, “Of Mermaids and Marriages: Seamus Heaney’s ‘Maighdean Mara’ and Nula Ní Dhomhnaill’s ‘an Mhaighdean Mhara’ in the Light of Folk Tradition,” Béaloideas 58 (1990).

Well, for one, there's a substantial difference between Old Norse in an academic context and late 19th century Scandinavia, which is what you seem to be asking for your first question.

The second question is difficult to ascertain the answer to anyway; we have no primary sources from the pagan eras which detail submarine life, only post-conversion stuff. That said, we know that they knew of whales based on kennings for 'sea' (most famously being hvalranns, or whale-house) but didn't make ay differentiation between, say, blues, humpbacks, or orcas. That said, they did know about narwhals, as the name is extant in ON (nárhválr, or pale-whale).

As far as mythology goes, there was Jörmungandr, the world-serpent, who lived beneath the waves, as well as Rán, Ægír, and Njörðr, who all lived below or in the seas.