The Spain international will appear at a media conference at the Bernabeu on Friday afternoon, where he will sign his new deal.
Isco’s contract was due to expire at the end of the season, meaning he could have left on a free transfer.
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The 25-year-old impressed last season after taking the place of the injured Gareth Bale, scoring 10 goals in 30 La Liga appearances.
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“Tomorrow, Friday, at 2pm, Isco will appear before the media in the press room of the Santiago Bernabéu stadium.”
Isco has featured seven times so far this season for Real and could feature against Real Sociedad on Sunday, live on Sky Sports Football HD from 7.40pm.