Fire arrows cause a significant explosion that will fling movable objects around. It makes a massive amount of noise, so use it only when you're not worried about being caught.
Fire arrows will cause flamable objects, like unlit torches or candles, to ignite.
Having a fire arrow selected as your current weapon makes you very easy to see.
Fire arrow: Used primarily by elite mercenaries, these will explode violently on impact. The tip glows and is easily seen in the dark.