dictionary thing above keyboard, what is it?

Go to Settings > General > Keyboard and disable both Auto-Correction and Predictive.

This is not a dictionary but a list of suggested words that start with the first letters you type. This allows you to select the word you mean to type without having to type it entirely, which saves you time.

That's strange. When I turn Predictive off, I no longer see the text predictions but a toolbar with different icons, to insert pictures, take a photo etc. (see below). Try to turn on and off Predictive to see if it "resets" the expected behavior.

I'm not sure what you mean.. Could you post a screenshot?