First question. How could Freddy destroy Jason if Jason is literally indestructible? Yeah Freddy used Jason as Pinball in dream sequence and even crushed him with a heater (I think that was heater) and Jason was like "That tickled".
Jason can take the punishment so he doesn't even try to dodge. While Freddy somehow learned Kung Fu and started jumping around just to deal some damage. Which was kinda funny to watch as Jason almost most of the time stood still, while Freddy slashed, pierced or kicked Jason.
As for exploiting Jason's fear for water, that was... pathetic. Not the fact that he used such tactic (that's what he does), but the fact that he failed to kill Jason even then and at the same time neutralized his fear for water (as lore says that he would normally "die", if he were to drown in that lake. Even so at the end of the movie he gets out of it.
As for the head. There is nothing to imply that this is a dream. Freddy even in human world is still an evil spirit, so it ain't surprising if he is immortal, even so unlike Jason he can be destroyed by certain methods, while Jason so far was immune to any kind of damage.
In short Freddy even with full disposal of his powers, failed to do anything to Jason. And again. Jason was thrown so much around, was because he has no need to dodge.
A lot of things people over look is that they kicked each others ass at the end and that someone else cut Freddy's head off. Freddy whooped Jason in the dream realm, he basically had him even with Jason's toughness. And he dd put up a fight. It basically played out the same way when they reached Crystal Lake. Jason had the advantage on Freddy this time but by the end of it, they were mutilating each other. Another thing that I find a bit stupid is that Freddy was portrayed as the villain even though Jason murdered nearly everyone. To top that, they had that moment where Lori drops the machete to Jason as he sunk. It was like she was honoring a hero. So it sucked in that respect for Freddy fans. Enjoyable film, regardless.