I recently bought and downloaded the GOTY from Steam and I was wondering what exactly needs to be done to use mods on the Steam bought game?

Check out this thread - between it and the links it contains, it's probably the most comprehensive guide to modding Morrowind that there is.

http://www.gamesas.com/topic/1305729-mod-recommendations-for-new-players/

Nexus Mod Manager.You'll thank me later.