For simplicity, get rid of $y$ and consider:
$\exists x (Px \lor Qx)$.
Consider an interpretation with domain the set $\mathbb N$ of natural numbers, and interpret the predicate $Px$ with the property $x<0$ and the predicate $Qx$ with the property $x=0$.
In this case, the formula amounts to:
$\exists x ((x < 0) \lor (x=0))$
that is true in $\mathbb N$.
Now consider the formula:
$\exists x (x < 0) \lor (x=0)$,
and consider a variable assignment $v: \text{Var} \to \mathbb N$ such that $v(x)=1$.
In this case, the formula means:
"either there is a (natural) number which is less than $0$ or $1=0$"
that is false in $\mathbb N$.
What does a statement with a free variable, like e.g. $x=1$, mean?
We need a "context" (technically called: variable assignment function), i.e. a way to assign a "temporary meaning" to the free variables.
We can compare a free variable to a pronoun of natural language.
To assert "$x$ is red" is the same as "it is red": its meaning depends on what the context assigns to "it".
Consider the example where I'm at my desk: on top if it there are two pens: one red and one blue, and no books.
If I'm asserting:
"there is an object on my desk such that (either it is book or it is red)",
my assertion is true: on my desk there is something red.
Consider now the different sentence:
"either (there is an object on my desk that is a book) or it is red".
What does it mean ? It depends on what "it" denotes. If I'm pointing with my finger at the blue pen, the sentence is false.