Earlier this season the 25-year-old had been tipped to exit the Bernabeu but an injury to Gareth Bale in late April saw the Spaniard come into the fold, a period which saw him rack up two goals and three assists.
Isco got the nod ahead of Bale to start in the Champions League final with Juventus tonight and Los Blancos went on to claim a 4-1 victory, in the process becoming the first side to retain the title.
Asked about his future by reporters after the game, Isco said: "I hope to sign the contract soon and there is no better place to play football than Madrid.
"If I'd known that the final would finish like this, I would sign up it for every season. It's the third Champions [League] in four seasons, my third as a professional.
"I would never have dreamt of that to happen in my life but thanks to the family we have made it possible."
Manchester City have been heavily linked with a move for Isco over the last 12 months.