Thermodynamic analysis and Monte Carlo simulation techniques were used to study cholesterol-lipid interactions in lipid membranes. Experimental data, including the maximum solubility of cholesterol in lipid bilayers, the 1-to-1 displacement of cholesterol by ceramide, and the cholesterol chemical activity with cholesterol oxidase (COD), were systematically analyzed using thermodynamic principles. A conceptual model, the umbrella model, is presented to describe the key cholesterol-lipid interaction in lipid membranes. In a lipid membrane, nonpolar cholesterol relies on polar phospholipid headgroup coverage to avoid the unfavorable free energy of cholesterol contact with water. This coverage requirement leads to cholesterol's strong tendency not to clustering in a bilayer, its preferential association with large headgroup lipids with saturated acyl chains, and its competition with ceramide for large headgroup lipids. The umbrella model was parameterized into a form of multibody (i.e., nonpairwise) interaction for Monte Carlo simulation, and the measured chemical potentials of cholesterol agreed favorably with the predictions from the simulation. Under the right conditions, the multibody interactions can also lead to the formation of cholesterol superlattices. Also, an intrinsic thermodynamic connection between a jump in chemical potential and a regular distribution (RD) of membrane molecules was uncovered. This study shows that combining thermodynamics with computer simulation can be a productive approach for analyzing and interpreting complex experimental data, and thermodynamics can yield a predicting power in bioscience research.