Isco has had an outstanding 2017 for club and country and been rewarded with a new deal which includes a £622m buyout clause.
The Spaniard took advantage of an injury to Gareth Bale and was integral to winning the Champions League and La Liga titles last season.
He was once again instrumental for Madrid in the UEFA Super Cup last month, scoring once as they beat Manchester United 2-1.
And last week, Isco scored twice for Spain as they beat Italy in a World Cup qualifier.
The 25-year-old had entered the last year of his contract at the Bernabeu and had been linked with a move to England but has now committed his long-term future.
Meanwhile Madrid midfielder Casemiro has defended Gareth Bale after he was booed by fans during their 3-0 Champions League win over Apoel Nicosia on Wednesday night.
He said: “He was a very strong player for us and I hope he continues to be so.
“We try to protect the players we have. We are always defending our own. It shows that we are a family.”
“I defend my team-mates as if they were my family and I am with them until the end.
“With the quality he has, things will be going well for him one day.”