Using The Displace Tool

Open up your image in Photoshop For this tutorial i have selected a wavy fabric. Although you free to experiment with your own type of image.

Goto "file > save as" to save your work and then save a duplicate of your PSD into a separate file, call it it whatever.psd. This will be used later in the tutorial, but for now just close the duplicate and work on your original image.

select the "type tool" and type a word onto the canvas.

Right-click on the type layer in the layer palette and select "rasterize layer" from the dropdown menu.

Then with the type layer still selected goto "filter > distort > displace" use the preset settings then click ok. When you click ok you should then get another window pop up, select the whatever.psd image you saved in step 1. This is how mine looks at this point.

Now add some layer styles, lower the opacity a bit correct any stretched bits, and your left with something like this.