How Does Making a Skill Legendary Affect Spells?

All of the perks for that tree are reset, so you will lose stagger effects and other bonuses that leveling up gave you.

You do not lose the spells themselves, nor have to get back to a certain level to use them again. There isn't a skill level requirement for using spells, so long as you have enough magicka to use them. Option 3 is probably the most accurate, in that they'll be a lot less effective due to your skill level and associated perks resetting.

Be wary of making a skill you use frequently legendary, especially a combat one. Going with alteration or smithing would be a good idea in my opinion.