What do I need? I assume the requirements are low? How would it work?
It would help to know things like budget and what the primary use is going to be - I'm guessing that it's not going to be a gaming PC, correct?
I plan on putting it in a nice case though so it looks nice. What about cooling? I don't really want it to sound like a PC so would I really need fans?
HTPCs are a different breed from their desktop counterparts - you can get by with the bare minimum and still have it do everything you want it to do. IMO - storage is key on a PC like this as you can get full utilization of Win 7 Home Premium's built-in DVR functionality.
What GPU would I need?
It won't take much to power one - you can get by using the onboard video and be fine. The Intel onboard HD graphics are OK but if you want full HD you should check out the AMD LLano as the built-in GPU is a Radeon 6670 and eliminates the need for a central video card.
This is one area where I'd actually encourage a micro ATX build - the demand for HTPCs has increased 10 fold over the last 4 - 5 years and a lot of companies like Silverstone and nMEDIA PC have produced some great looking cases that can actually make your HTPC look like a home theater component rather than a PC sitting next to your HDTV.
And then your storage options will vary - that's why I didn't include the HD in the price. In this case it would be better to have your data separate from your OS - get like a small 60GB SSD for your OS and then something like a Seagate Momentus XT for your secondary storage - around the 500GB - 750GB for Windows 7 Home Premium's DVR functionality.
That is really nice, didn't think it would turn out so expensive though, is the 500w PSU really necessary or is it for the micro atx case? Is 8gb RAM also necessary?
I have windows 7 atm so I don't need to buy that. I was hoping to buy a low end GPU maybe like a Radeon 6450, unless that'd make no difference against the CPU's on board GPU?
It won't really. I built an HTPC around some existing components that I had no use for and I bought a really low end GPU like that, and I discovered that those GPUs really make no difference between that and the onboard.
If you really wanted to you could consider something like the AMD Llano which has a built-in Radeon GPU on the chip. Maybe go for something like this: