They might be really surprised. Some characters could be flattered by the positive portrayals in the fanfiction. For example, Mirabel might be happy to see different interpretations of her story and how she's seen as a hero in some fics.
There are also some Encanto - specific fanfiction communities on social media platforms. For example, on Tumblr, there are often users who share and recommend Encanto fanfictions. You can search for tags like #EncantoFanfiction and #Madrigals to find some great reads. Additionally, some Discord servers dedicated to Encanto might have channels where fans discuss and share their favorite fanfictions about the Madrigals.
One interesting storyline could be exploring the unshown daily lives of the Madrigals before the events of Encanto. For example, how Julieta manages to cook such magical food every day and what kind of experiments she might have done in the kitchen. Another could be a story about Bruno's time in the walls from the point of view of the other Madrigals, like how they might have unknowingly interacted with him without realizing it was him. There could also be a fanfiction focusing on the younger Madrigals and their playtime, and how their powers influenced their games.
Encanto is about a magical family living in a hidden place in Colombia. Each family member has a unique gift, but the main character, Mirabel, doesn't have one. The story follows her as she tries to save the magic of their home.
Encanto is an original story. Disney's team of writers and animators came up with the concept and brought it to life on the big screen. It's not a adaptation or retelling of another story.