He apparently promised PSG he would never leave on a free as he apparently supported them as a kid, it makes sense to sign a short extension then PSG can get a fee from Madrid. If that happens it would strengthen our chances of Haaland, as PSG will ask Madrid for 100 plus for Mbappe. Im guessing Mbappe does not want to burn bridges with PSG.
Madrid could well look elsewhere. He can sign a pre-contract with them right now. If he went and extended, he would just be costing them 100m, and hkmself a signing on bonus. It would make far more sense signing Haaland for his release clause than waiting to pay over 100m for a player that had the chance to join on a free.