You need the encoder on the actual spindle. we shoe horned ours in (the 60's vintage original control didn't have one..)
this may be an option for you..
Adding a spindle encoder to a Bridgeport 1J head
As far as the dynamic braking on the vfd - depends on what you want. it probably will not stop it as fast as the brake - but depending on the rotational mass of the spindle drive train - it will probably be pretty quick.. We are just using the vfd braking for our hmc - it is pretty slow but our spindle gear train is pretty hefty..
sam