McHale is in his fourth season in Houston, where he has compiled a 153-104 record.
Rockets owner Leslie Alexander says: "He embodies the leadership, passion, knowledge, and team-first qualities we need as we continue our pursuit of bringing another NBA championship to the city of Houston."
The 57-year-old McHale led the Rockets to the playoffs in the last two seasons before they were eliminated in the first round.
McHale won three NBA championships in a 13-year Hall of Fame playing career with the Celtics. He worked with the Timberwolves for 16 seasons, including two stints as the team's coach, before joining the Rockets in 2011.
The Rockets are 20-7 and in second place in the Southwest Division.