Te (you) francia (French) are (vagy), vagy (or) spanyol (Spanish)?

You can also say "Te francia, vagy spanyol vagy?". It's less confusing

The first "vagy" is a verb, present tense, 2nd person of "to be" (te vagy). The second "vagy" is a conjuction, equivalent to "or" in English. So these two words are just homonyms, i.e. they have the same spelling, but different meaning.