The two sides agreed to a three-year, $100 million deal, sources told ESPN.
"At the end of the day, this was an easy decision," Lowry said in a post on The Players' Tribune. "And all of those roads ... they all led me back to the same place: home.
"They all led me back to Toronto."
Lowry opted out of the final year of his contract with the Raptors in May. The three-time All-Star had one year and $12 million remaining on the four-year, $48 million deal he signed in July 2014.
After the season, Lowry told reporters that his main consideration in choosing where to sign would be his ability to win a championship.
"I want a ring," he said in May. "That's all that drives me. I want to just get better, I want to have fun, I want to win a ring. I want to make sure my family is happy. That's all I've thought about right now."
In his post Sunday, Lowry said he believes that a championship is in Toronto's NBA future.
"My heart is telling me that this is the best city in the world, with the best basketball fans in the world," Lowry wrote. "It's telling me that the Raptors can be a championship-level team, sooner than later."
Lowry's deal now pushes the Raptors into the luxury tax for the first time since the 2003-04 season.
Lowry, 31, averaged career bests of 22.4 points, 7.0 assists and 4.8 rebounds per game this past season but was limited to 60 games because of a right wrist injury that required surgery in February. He also missed Game 4 of the team's second-round series against the Cleveland Cavaliers with an ankle injury.
Lowry, a Philadelphia native, has spent the past five seasons in Toronto after previous stops with Memphis and Houston.
Lowry was ranked No. 4 on the list of top available free agents this offseason compiled by ESPN's Kevin Pelton.
Information from ESPN's Bobby Marks was used in this report.