But God, being rich in mercy, because of the great love with which he loved us, even when we were dead in our trespasses, made us alive together with Christ; by grace you have been saved. Ephesians 2:4-5 (ESV)
According to Merriam-Webster's dictionary, the definition of mercy is: "compassion or forbearance shown especially to an offender or to one subject to one's power." God showed His mercy toward us through His love by having compassion on us. We deserve eternal punishment because of sin. Yet God chose to pardon our sins because of His mercy.
Grace, according to Merriam-Webster's dictionary means: "unmerited divine assistance given to humans for their regeneration or sanctification." So when God pardoned our sins, He made the way for us to have salvation. He saved us purely because He loves us. Besides, He gives us grace and blessing beyond measure, even though we don't deserve it!
"A state of mind that sees God in everything is evidence of growth in grace and a thankful heart." - Charles Finney