There had been speculation that the former Chelsea boss was considering a return to the Premier League, but he has committed himself to Los Blancos for an extra two years
It was reported in January that the Portuguese coach was set for a return to England this summer, but on Tuesday morning it was announced that he had agreed a two-year extension to his existing deal that was set to run out in 2014.
"I feel happy," Mourinho enthused in an interview with Realmadrid TV. "If I was not, I would not have signed this agreement.
"I would like to think that it is not just me that is happy but also Real Madrid - the president [Florentino Perez], [executive] Jose Angel Sanchez and directors, who have trusted me and think I'm the ideal coach for this project we have until 2016.
"I have been talking with the players in recent months, analysing the situation, and my strong sense is that the squad in general is also happy with this decision.
"My wife and my children, who are central to my professional decisions, are comfortable with this choice.
"I think this is the perfect challenge for me for my next four years because it is difficult and that gets more out of you.
"At this stage in my career I need big challenges to force me to continue to get better."
Mourinho, who has never spent more than three seasons at one club, explained that there were a number of factors in his decision to commit himself to Madrid for a maximum of another four years.
"Firstly, the president's desire to have what is not common in football today; to be able to think long term," the two-time Champions League winner explained.
"There was also the confidence I have always shown in my work. But I've always said it was very important to me to have the feeling that the fans, the team and club are happy and confident in my work.
"And I started to learn more about this club with all its very great qualities and I am delighted to continue and plan ahead.
"We obviously know we have to think about tomorrow and not speak too much of the long term. And that's what we tried to do in the past two years.
"You think about the future. But in a club of this size you have to get results, you have to win and that's what we tried to do in these two years together and what we will try to continue doing over the next four."
Indeed, Mourinho is in no doubt that his current line-up is capable of building on their record-breaking Liga campaign, which saw them finish with 100 points to their name.
"I think this group of players is still young and that their best days are yet to come," the former Chelsea boss mused.
"It's a very very young squad. There is no player who could not still be here in 2016.
"Most of them will arrive at that point in the peak of their careers, some will arrive in the final stretch, but they will all get there without any problems in terms of their age or ability.
"We will make a couple of signings to improve the team that reached 100 points, which is how I think this side will be remembered in the history of Real Madrid, but it deserves our confidence and it is these players who will face the next challenge."
Mourinho added that while Madrid had come up short in the Champions League, losing out to Bayern Munich on penalties, he felt that they had proven themselves the best side on the planet because of their domestic heroics.
"Certainly, Real Madrid has won many fans in the world this year because we played the best football in the world, even though we have not won the European competition," he argued.
"We have won the hardest league playing fantastic football and I think that's the most important thing.
"In the second season we won the league, as we had planned, and we'll see what comes now."
Mourinho arrived in the Spanish capital in 2010, fresh from his treble success with Serie A giants Inter.
Since March, Goal.com has been publishing exclusive extracts from Luca Caioli's new book, Ronaldo: The Obsession for Perfection. This Friday's excerpt looks at how Cristiano's goal saw Real Madrid beat Barcelona in last season Copa del Rey final. Don't miss it!