The new agreement ties Jones to SMU through the 2017 season.
Jones, 60, just completed his sixth season at SMU, going 5-7. It was his first sub-.500 season since his first coaching the Mustangs, who went 1-11 in 2008. The school went to four bowl games in the seasons between 2008 and 2013.
"I appreciate the opportunity to continue the work we began six years ago. There is no place I'd rather be than here at SMU," Jones said in a statement Monday. "I am proud of the progress we have made thus far, but many goals remain unfinished, including restoring SMU football's championship tradition."
Jones previously coached at Hawaii, going 76-41 over nine seasons. He also coached the NFL's Atlanta Falcons (1994-96) and served as interim coach for the San Diego Chargers (1998). His NFL record is 22-36.
SMU hadn't been to a bowl game since 1984 before Jones took the Mustangs to the Hawaii Bowl after the 2009 season. SMU was handed the so-called death penalty by the NCAA for rules violations and took years to return to a winning team.
"Coach Jones and his staff have successfully engineered our football program's journey from relative obscurity to competitive relevance," SMU Athletic Director Rick Hart said. "Under their direction, we have participated in a conference championship game and a school-record four consecutive bowl games.
"We look forward to partnering with coach Jones as we now set our sights on the next phase of our rise to prominence: establishing SMU football as a championship program."