The 29-year-old Coady started his career across the city with Liverpool, but said he was "desperate to come here, to play for this club. I've got family and friends who are massive Evertonians."
"It's incredible to join Everton," Coady told the club's TV channel. "As soon as I heard the interest, from the manager [Frank Lampard] but also the Football Club itself, I really wanted to be part of it straight away. I'm over the moon to join."
The 29-year old joined Wolves as a midfielder in 2015 from Huddersfield Town and was transformed into a central defender under former Wolves manager Nuno Espirito Santo. He has made 317 appearances in all competitions for the club.
Coady has 10 England caps, making his debut in August 2020 in the Nations League match against Denmark.
"I'm here to give absolutely everything I've got for this football club. It's important I work as hard as I can to help the club move forward and make people proud," Coady said.
Coady is Everton's fourth signing of the current transfer window after the arrivals of defender James Tarkowski, former Wolves teammate Ruben Vinagre and forward Dwight McNeil.
With Coady on his way out for the season, Wolves used the occasion to announce the arrival of winger Goncalo Guedes on a five-year deal from Valencia.
"We have been monitoring Goncalo for a long time and are very pleased to welcome him to Wolves," club chairman Jeff Shi said of the 25-year-old forward.
"He has natural talent and has performed very well across Europe and for his country, and we think he is well suited to the Premier League.
"Goncalo worked with Bruno [Lage] at Benfica and played with many members of our squad previously, so we're confident he will settle quickly into the group here."
Guedes joined Valencia in 2017 from Paris Saint-Germain and made nearly 200 appearances in all competitions for the Spanish club, scoring 40 goals and providing 32 assists.
Everton's need for a central defender grew when Ben Godfrey, another England international, injured his right leg on Saturday in a 1-0 home loss against Chelsea. Godfrey had surgery on a fractured fibula and is set to be out for three months, Everton said.
Godfrey suffered the injury on Saturday as he made a last-ditch recovery tackle following a poor pass and the 24-year-old was taken off the pitch and straight to a hospital.
"Ben Godfrey underwent successful surgery this morning on the fractured fibula he sustained," Everton said. "The defender will now begin rehabilitation at Finch Farm under the care of the club's medical team and is expected to be out for around three months."
Everton said defender Yerry Mina suffered an ankle ligament injury in the second half of the game and will see a specialist this week to discover the full extent of the problem.
Information from Reuters and the Associated Press was used in this story.