DS6.5 is STILL like this (though not as frequent when he was 3-4). We run his ceiling fan all night (well we run all of ours), and it makes just the right amount of noise. It's helpful but doesn't always keep the dreams away. We try to talk about happy things before bed and try not to read "scary" stories (DS was terrified of Nemo up until he was 5.5, so scary to him doesn't mean scary to "us"). DS has an AMAZING imagination, which carries his thought process way away from just the words he reads on paper, and I imagine this is exactly what is happening to your DS.
I have no real advice, but just wanted to say you are definitely not alone.
