I agree with Heydave that grace is more a divine enabling power to overcome sin. It appears that the church is somewhat split on this definition between an enabling power and unmerited favor.
If you do any research on what grace is in evangelical circles you will hear both definitions and at one point I was on the unmerited favor side UNTIL I realized what true biblical repentance is.
Not speaking of anyone here as I do not know your beliefs on this, but I have found that people who see grace as unmerited favor tend to use grace as a license to continue in sinful behavior.
I have seen it, discussed it, and had people excuse their sinful behavior because they said we are under grace and not law.
For me, when I was filled with the Holy Spirit after 9 years of struggling with sin in my own life, I was finally empowered to overcome sin in my own life. Don't get me wrong, I like Paul have to die daily and have not arrived, I know I will not fully be like Him until I see Him face to face.
When I was baptized in the Spirit however, this was an area that the Holy Spirit instructed me in my own life and allowed me to see where much of the church is on this issue.
I could see men preaching easy believism (is that a word?)They would preach a gospel that tells people to just believe in God but Repentance was missing from this Gospel.
1 John speaks of Gods commandments in the OP that was raised. Chapter 3 deals with people who continue, abide, and practice sin on an ongoing basis as someone who has never seen or known God, they are simply not His.
This is the problem as far as I have witnessed in much of Christendom. This idea that grace covers sin. As I said in the OP Paul says shall we continue in sin that grace may abound?
For Paul also when he was being tormented by a messenger of satan who was sent to buffet him he lists in chapter 11 of 2 Corinthians what that buffeting included, that Gods grace or enabling power was sufficient to endure the affliction, persecution, etc..
Many times we can talk past one another on a subject like this, but again for me, the danger and misunderstanding of what grace actually is, is a major difference between heaven and hell and it is a very serious subject.
I know I cannot keep the law in order to be saved, but by Gods grace, I can keep the law because I am saved. By the law, I speak of the 10 commandments. Many are of a different opinion on this I am well aware. BTW, I do sin, not in an abiding, continuing, or usual practice way. But there are times when the adversary snares me, but when I do sin, I feel terrible, lose sleep, and I am grieved to the uttermost, UNTIL, I get right with God, repent and confess the sin.
As far as unmerited favor is concerned, that is my understanding as the definition of mercy.