Free was scheduled to make $7 million this season and count $10.02 million against the salary cap, but the new two-year deal opens up salary-cap room for the Cowboys and allows Free to remain with the team that drafted him in 2007.
He will make $3.5 million in each of the next two seasons. His salary in 2013 is guaranteed, a source told ESPN NFL Insider Ed Werder.
Free's new contract clears roughly $3.5 million in salary-cap space, which the Cowboys could use in extension talks for linebacker Sean Lee, who is an unrestricted free agent after this season.
Free has started 48 consecutive games since 2010 but struggled in his return to right tackle in 2012, which led to the salary reduction. In 2011, Free signed a four-year, $32 million deal, including $17 million guaranteed.
Throughout the offseason, the Cowboys kept insisting they wanted Free to return while also putting out feelers to the agents for Tyson Clabo and Eric Winston. Clabo recently signed with the Miami Dolphins, which quickened the talks between the Cowboys and Free.
The Cowboys were encouraged by Free's late-season play in 2012 after he platooned with Jermey Parnell at right tackle, and believe a second year under assistant coach Bill Callahan will help return Free to better form.